NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Change of Name
Effective May 23, 2019, NCI Building Systems, Inc. changed its name to Cornerstone Building Brands, Inc. (together with its subsidiaries, unless otherwise indicated, the “Company,” “Cornerstone,” “NCI”, “we,” “us” or “our”). In connection with the name change, the Company changed its NYSE trading symbol from “NCS” to “CNR”.
Nature of Business
Cornerstone Building Brands, Inc. is a leading manufacturer of external building products in North America. Headquartered in Cary, North Carolina, the Company serves residential and commercial customers across new construction and the repair & remodel markets.
Basis of Presentation
Our consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All intercompany accounts, transactions and profits arising from consolidated entities have been eliminated in consolidation.
Reporting Periods
On November 16, 2018, the Company’s Board of Directors approved a change to the Company’s fiscal year end from a 52/53 week year with the Company’s fiscal year end on the Sunday closest to October 31 to a calendar year of the twelve-month period from January 1 to December 31. The Company elected to change its fiscal year end in connection with the Merger (as defined below) to align the Company’s fiscal year end with Ply Gem’s (as defined below). As a result of this change, the Company filed a Transition Report on Form 10-Q that included the financial information for the transition period from October 29, 2018 to December 31, 2018, which period is referred to herein as the “Transition Period”. The financial statements contained herein are being filed as part of an Annual Report on Form 10-K for the period from January 1, 2019 through December 31, 2019. The results of operations for the 52-week years ended October 28, 2018 and October 29, 2017 are presented herein as the comparable periods to the calendar year ended December 31, 2019. The Company did not recast the consolidated financial statements for the periods from January 1, 2018 through December 31, 2018 or January 1, 2017 through December 31, 2017 because the financial reporting processes in place at that time included certain procedures that were completed only on an annual basis. Consequently, to recast this period would have been impractical.
All references herein to "fiscal year 2019" or "fiscal 2019" refer to the calendar year ended December 31, 2019. In addition, all references herein to "fiscal year 2018" or "fiscal 2018" refer to the 52-week year ended October 28, 2018, and all references herein to "fiscal year 2017" or "fiscal 2017" refer to the 52-week year ended October 29, 2017.
Change in Operating Segments
During the Transition Period, the Company began reporting results under three reportable segments: (i) Commercial; (ii) Siding; and (iii) Windows, to align with how the Company manages its business, reviews operating performance and allocates resources following the Merger. The Commercial segment will include the aggregate operating results of the NCI’s legacy businesses. The Siding and Windows segments will include the operating results of the legacy Ply Gem operating segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for bad debts and inventory reserves, accounting for business combinations, valuation of reporting units for purposes of assessing goodwill and other indefinite-lived intangible assets for impairment, valuation of asset groups for impairment testing, accruals for employee benefits, general liability insurance, warranties and certain contingencies. We base our estimates on historical experience, market participant fair value considerations, projected future cash flows, and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and may consist of time deposits with a number of commercial banks with high credit ratings, money market instruments, certificates of deposit and commercial paper. The Company's policy allows it to also invest excess funds in no-load, open-end, management investment trusts (“mutual funds”). The mutual funds invest exclusively in high quality money market instruments. As of December 31, 2019, the Company's cash and cash equivalents were only invested in cash.
(c) Accounts Receivable and Related Allowance. The Company reports accounts receivable net of the allowance for doubtful accounts. Trade accounts receivable are the result of sales of metal building products, insulated metal panels, metal coating, vinyl siding, metal siding, injection molded products, vinyl windows, aluminum windows, and other products and services to customers throughout the United States and Canada and affiliated territories, including international builders who resell to end users. Sales are primarily denominated in U.S. dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process and we require payment prior to shipment for certain international shipments.
The Company establishes reserves for doubtful accounts on a customer by customer basis when we believe the required payment of specific amounts owed is unlikely to occur. Bad debt provisions are included in selling, general and administrative expenses. In establishing these reserves, the Company considers changes in the financial position of a customer, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with our customers. Our allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. We determine past due status as of the contractual payment date. Interest on delinquent accounts receivable is included in the trade accounts receivable balance and recognized as interest income when earned and collectability is reasonably assured. Uncollectible accounts are written off when a settlement is reached for an amount that is less than the outstanding historical balance, all collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
The following table represents the rollforward of the reserve for uncollectible accounts for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
December 31,
2019
|
|
October 29,2018 - December 31, 2018
|
|
October 28,
2018
|
|
October 29,
2017
|
|
Beginning balance
|
$
|
10,270
|
|
|
$
|
6,249
|
|
|
$
|
8,325
|
|
|
$
|
7,413
|
|
|
Provision for bad debts
|
2,035
|
|
|
(786)
|
|
|
(491)
|
|
|
1,948
|
|
|
Amounts charged against allowance for bad debts, net of recoveries
|
(2,807)
|
|
|
188
|
|
|
(1,585)
|
|
|
(1,036)
|
|
|
Allowance for bad debts of acquired company at date of acquisition
|
464
|
|
|
4,619
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
$
|
9,962
|
|
|
$
|
10,270
|
|
|
|
$
|
6,249
|
|
|
$
|
8,325
|
|
(d) Inventories. Beginning with the Company's prospective adoption of ASU 2015-11 in the first quarter of fiscal 2018, inventories are stated at the lower of cost or net realizable value less allowance for inventory obsolescence using the First-In,
First-Out Method (“FIFO”). Prior inventory balances are stated at the lower of cost or market value less allowance for inventory obsolescence using FIFO.
The components of inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Raw materials
|
$
|
239,063
|
|
|
$
|
311,183
|
|
|
Work in process and finished goods
|
200,131
|
|
|
225,492
|
|
|
|
$
|
439,194
|
|
|
$
|
536,675
|
|
The following table represents the rollforward of reserve for obsolete materials and supplies activity for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
December 31,
2019
|
|
October 29,2018 - December 31, 2018
|
|
October 28,
2018
|
|
October 29,
2017
|
|
Beginning balance
|
$
|
19,227
|
|
|
$
|
6,619
|
|
|
$
|
5,205
|
|
|
$
|
3,984
|
|
|
Provisions
|
3,207
|
|
|
1,025
|
|
|
3,069
|
|
|
1,923
|
|
|
Dispositions
|
(4,082)
|
|
|
(490)
|
|
|
(1,655)
|
|
|
(702)
|
|
|
Reserve of acquired company at date of acquisition
|
360
|
|
|
12,073
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
$
|
18,712
|
|
|
$
|
19,227
|
|
|
$
|
6,619
|
|
|
$
|
5,205
|
|
The principal raw material used in the manufacturing of our Commercial segment is steel which we purchase from multiple steel producers. The principal raw material used in the manufacturing of our Siding segment is PVC resin which we purchase from multiple producers. The principal raw material used in the manufacturing of our Windows segment is PVC resin, aluminum, and glass which we purchase from multiple producers.
(e) Assets Held for Sale. The Company record assets held for sale at the lower of the carrying value or fair value less costs to sell. The following criteria are used to determine if property is held for sale: (i) management has the authority and commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition; (iii) there is an active program to locate a buyer and the plan to sell the property has been initiated; (iv) the sale of the property is probable within one year; (v) the property is being actively marketed at a reasonable sale price relative to its current fair value; and (vi) it is unlikely that the plan to sell will be withdrawn or that significant changes to the plan will be made.
In determining the fair value of the assets less cost to sell, the Company considers factors including current sales prices for comparable assets in the area, recent market analysis studies, appraisals and any recent legitimate offers. If the estimated fair value less cost to sell of an asset is less than its current carrying value, the asset is written down to its estimated fair value less cost to sell. The total carrying value of assets held for sale is $1.8 million and $7.3 million at December 31, 2019 and 2018, respectively. Assets held for sale at December 31, 2019 are actively marketed for sale or are under contract.
During fiscal 2019 and 2018, the Company sold certain idled facilities in our Commercial segment, along with related equipment, which previously had been classified as held for sale. In connection with the sales of these assets, during fiscal 2019 and 2018, the Company received net cash proceeds of $5.5 million and $4.1 million, respectively, and recognized a net gain (loss) of $(41) thousand and $0.5 million, respectively, which is included in restructuring and impairment charges, net, in the consolidated statements of operations. During fiscal 2019, the Company determined an alternative use for a facility in the Commercial segment that had previously been classified as held for sale and reclassified the net book value of $1.7 million to property, plant and equipment and recorded an immaterial depreciation adjustment. Additionally, during fiscal 2019, the Company acquired certain real property assets of $1.8 million, through its executive relocation program which are classified as held for sale as of December 31, 2019.
Certain assets held for sale are valued at fair value and are measured at fair value on a nonrecurring basis. Assets held for sale are reported at fair value, if, on an individual basis, the fair value of the asset is less than cost. The fair value of assets held for sale is estimated using Level 3 inputs, such as broker quotes for like-kind assets or other market indications of a potential selling value that approximates fair value. Assets held for sale, reported at fair value less cost to sell totaled $1.8 million as of December 31, 2019.
Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from the estimates used in our historical analysis. The Company's assumptions about property sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. The Company determined the estimated fair values of assets held for sale based on current market conditions and assumptions made by management, which may differ from actual results and may result in impairments if market conditions deteriorate.
(f) Property, Plant and Equipment. Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are capitalized and amortized using the straight-line method over the shorter of their estimated useful lives or the term of the underlying lease. Computer software developed or purchased for internal use is depreciated using the straight-line method over its estimated useful life. Depreciation and amortization are recognized in cost of sales and selling, general and administrative expenses based on the nature and use of the underlying asset(s).
Depreciation expense for fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018 was $86.2 million, $32.7 million, $31.7 million and $10.8 million, respectively.
Property, plant and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Land
|
$
|
24,510
|
|
|
$
|
26,029
|
|
|
Buildings and improvements
|
266,094
|
|
|
258,547
|
|
|
Machinery and equipment
|
918,380
|
|
|
799,342
|
|
|
|
1,208,984
|
|
|
1,083,918
|
|
|
Less accumulated depreciation
|
(556,143)
|
|
|
(469,911)
|
|
|
Total property, plant and equipment, net
|
$
|
652,841
|
|
|
$
|
614,007
|
|
Estimated useful lives for depreciation are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
15
|
–
|
39 years
|
|
Machinery and equipment
|
3
|
–
|
15 years
|
The Company capitalizes interest on capital invested in projects in accordance with Accounting Standards Codification (“ASC”) Topic 835, Interest. For fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, the total amount of interest capitalized was $1.2 million, $0.4 million, $0.2 million and $0.1 million, respectively. Upon commencement of operations, capitalized interest, as a component of the total cost of the asset, is amortized over the estimated useful life of the asset.
Involuntary conversions result from the loss of an asset because of an unforeseen event (e.g., destruction due to fire). Some of these events are insurable and result in property damage insurance recovery. Amounts the Company receives from insurance carriers are net of any deductibles related to the covered event. The Company records a receivable from insurance to the extent it recognizes a loss from an involuntary conversion event and the likelihood of recovering such loss is deemed probable at the balance sheet date. To the extent that any of the Company’s insurance claim receivables are later determined not probable of recovery (e.g., due to new information), such amounts are expensed. The Company recognizes gains on involuntary conversions when the amount received from insurers exceeds the net book value of the impaired asset(s). In addition, the Company does not recognize a gain related to insurance recoveries until the contingency related to such proceeds has been resolved, through either receipt of a non-refundable cash payment from the insurers or by execution of a binding settlement agreement with the insurers that clearly states that a non-refundable payment will be made. To the extent that an asset is rebuilt or new assets are acquired, the associated expenditures are capitalized, as appropriate, in the consolidated balance sheets and presented as capital expenditures in the Company’s consolidated statements of cash flows. With respect to business interruption insurance claims, the Company recognizes income only when non-refundable cash proceeds are received from insurers, which are presented in the Company’s consolidated statements of operations as a component of gross profit or operating income and in the consolidated statements of cash flows as an operating activity.
In June 2016, the Company experienced a fire at a facility in the Commercial segment. The Company estimated that fixed assets with a net book value of approximately $6.7 million were impaired as a result of the fire. During fiscal 2017, the Company settled the property damage claims with the insurers for actual cash value of $18.0 million. Of this amount, the Company received proceeds of $10.0 million from our insurers during fiscal 2016. The remaining $8.0 million was received in May 2017.
Approximately $8.8 million was previously recognized to offset the loss on involuntary conversion and other amounts incurred related to the incident. The remaining $9.2 million was recognized as a gain on insurance recovery in the consolidated statement of operations during 2017 as all contingencies were resolved.
The Company’s property insurance policy is a replacement cost policy. During fiscal 2018, the Company received final proceeds of $4.7 million as reimbursement for new assets acquired and recognized a $4.7 million gain on insurance recovery in the consolidated statements of operations.
(g) Internally Developed Software. Internally developed software is stated at cost less accumulated amortization, is included within property, plant and equipment within our consolidated balance sheets, and is amortized using the straight-line method over its estimated useful life ranging from 3 to 7 years. Software assets are reviewed for impairment when events or circumstances indicate the carrying value may not be recoverable over the remaining lives of the assets. During the software application development stage, capitalized costs include external consulting costs, cost of software licenses and internal payroll and payroll related costs for employees who are directly associated with a software project. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred.
(h) Goodwill and Other Intangible Assets. The Company reviews the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill and indefinite lived intangible assets as required by ASC Topic 350, Intangibles — Goodwill and Other. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. Prior to July 30, 2017, the test for impairment was a two-step process that involved comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, the goodwill of the reporting unit was not considered impaired; therefore the second step of the impairment test would not be deemed necessary. If the carrying amount of the reporting unit exceeded its fair value, we would then perform the second step to the goodwill impairment test, which involved the determination of the fair value of a reporting unit’s assets and liabilities as if those assets and liabilities had been acquired/assumed in a business combination at the impairment testing date, to measure the amount of goodwill impairment loss to be recorded. However, with the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-04, the Company prospectively adopted a new accounting principle that eliminated the second step of the goodwill impairment test. Therefore, beginning with the annual goodwill impairment tests occurring on the first day of the fourth quarter of fiscal 2017, if the carrying value of a reporting unit exceeds its fair value, we measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Unforeseen events, changes in circumstances, market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affect the fair value of the Company's assets and result in a non-cash impairment charge. Some factors considered important that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of the Company's use of acquired assets or the strategy for its overall business and significant negative industry or economic trends. The Company recorded a non-cash loss on goodwill impairment of $6.0 million in fiscal 2017, which is included in goodwill impairment in the consolidated statements of operations. See Note 6 — Goodwill and Other Intangible Assets.
(i) Leases. The Company leases certain manufacturing, warehouse and distribution locations, vehicles and equipment, including fleet vehicles. Many of these leases have options to terminate prior to or extend beyond the end of the term. The exercise of the majority of lease renewal options is at the Company’s sole discretion. Some lease agreements have variable payments, the majority of these are real estate agreements in which future increases in rent are based on an index. Lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases, applying the standard to leases existing at the effective date. For arrangements entered into following the transition date, applicability of the standard is determined at inception.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the reasonably expected holding period at commencement date. Few of the Company’s lease contracts provide a readily determinable implicit rate. For these contracts, an estimated incremental borrowing rate (“IBR”) is utilized, based on information available at the inception of the lease. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
Accounting for leases may require judgment, including determining whether a contract contains a lease, what incremental borrowing rates to utilize for leases without a stated implicit rate, what the reasonably certain holding period is for a leased asset, and the allocation of consideration to lease and non-lease components. The Company has elected the practical expedient to not separate lease and non-lease components for the majority of leases. Where components are separated, the allocation is based on the Company’s best estimate of standalone price.
(j) Revenue Recognition. The Company enters into contracts that pertain to products, which are accounted for as separate performance obligations and are typically one year or less in duration. The Company does not exercise significant judgment in determining the timing for the satisfaction of performance obligations or the transaction price. Revenue is measured as the amount of consideration expected to be received in exchange for our products. The Company has elected to apply the practical expedient provided for in ASU No. 2014-09 and has not disclosed information regarding remaining performance obligations that have original expected durations of one year or less. Revenue is generally recognized when the product has shipped from the Company's facility and control has transferred to the customer. Generally, this criteria is met at the time product is shipped or services are complete. Generally, the customer takes title upon shipment and assumes the risks and rewards of ownership of the product. For certain products, it is industry practice that customers take title to products upon delivery, at which time revenue is then recognized by the Company. For a portion of the Company's business, when the Company processes customer owned material, control is deemed to transfer to the customer as the processing is being completed. Allowances for cash discounts, volume rebates and other customer incentive programs, as well as gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed upon with the Company’s various customers, which are typically earned by the customer over an annual period.
The Company's revenues are adjusted for variable consideration, which includes customer volume rebates and prompt payment discounts. The Company measures variable consideration by estimating expected outcomes using analysis and inputs based upon anticipated performance, historical data, and current and forecasted information. Customer returns are recorded as a reduction to sales on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. The Company generally estimates customer returns based upon the time lag that historically occurs between the sale date and the return date while also factoring in any new business conditions that might impact the historical analysis such as new product introduction. Measurement of variable consideration is reviewed by management periodically and revenue is adjusted accordingly. The Company does not have significant financing components. The Company recognizes installation revenue, primarily within the stone veneer category, over the period for which the stone is installed, which is typically a very short duration.
Shipping and handling activities performed by the Company are considered activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales.
In accordance with certain contractual arrangements, the Company receives payment from our customers in advance related to performance obligations that are to be satisfied in the future and recognize such payments as deferred revenue, primarily related to the Company's weathertightness warranties (see Warranty accounting policies below).
A portion of our revenue, exclusively within the Commercial segment, includes multiple-element revenue arrangements due to multiple deliverables. Each deliverable is generally determined based on customer-specific manufacturing and delivery requirements. Because the separate deliverables have value to the customer on a stand-alone basis, they are typically considered separate units of accounting. A portion of the entire job order value is allocated to each unit of accounting. Revenue allocated to each deliverable is recognized upon shipment. The Company uses estimated selling price (“ESP”) based on underlying cost plus a reasonable margin to determine how to separate multiple-element revenue arrangements into separate units of accounting, and how to allocate the arrangement consideration among those separate units of accounting. The Company determines ESP based on normal pricing and discounting practices.
The following table presents disaggregated revenue disclosure details of net sales by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29,2018 - December 31, 2018
|
|
Commercial Net Sales Disaggregation:
|
|
|
|
|
|
|
|
|
Metal building products
|
$
|
1,249,757
|
|
|
$
|
1,367,998
|
|
|
$
|
1,204,532
|
|
|
$
|
198,483
|
|
|
Insulated metal panels
|
441,441
|
|
|
424,762
|
|
|
372,304
|
|
|
52,044
|
|
|
Metal coil coating
|
156,695
|
|
|
207,817
|
|
|
193,442
|
|
|
35,995
|
|
|
Total
|
$
|
1,847,893
|
|
|
$
|
2,000,577
|
|
|
$
|
1,770,278
|
|
|
$
|
286,522
|
|
|
|
|
|
|
|
|
|
|
|
Siding Net Sales Disaggregation:
|
|
|
|
|
|
|
|
|
Vinyl siding
|
$
|
525,005
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,142
|
|
|
Metal
|
263,018
|
|
|
—
|
|
|
—
|
|
|
23,104
|
|
|
Injection molded
|
66,578
|
|
|
—
|
|
|
—
|
|
|
5,123
|
|
|
Stone
|
92,228
|
|
|
—
|
|
|
—
|
|
|
2,499
|
|
|
Other products & services
|
164,578
|
|
|
—
|
|
|
—
|
|
|
9,106
|
|
|
Total
|
$
|
1,111,407
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82,974
|
|
|
|
|
|
|
|
|
|
|
|
Windows Net Sales Disaggregation:
|
|
|
|
|
|
|
|
|
Vinyl windows
|
$
|
1,838,796
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
181,624
|
|
|
Aluminum windows
|
53,622
|
|
|
—
|
|
|
—
|
|
|
4,700
|
|
|
Other
|
38,029
|
|
|
—
|
|
|
—
|
|
|
4,050
|
|
|
Total
|
$
|
1,930,447
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190,374
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales:
|
$
|
4,889,747
|
|
|
$
|
2,000,577
|
|
|
$
|
1,770,278
|
|
|
$
|
559,870
|
|
(k) Equity Raising and Deferred Financing Costs. Equity raising costs are recorded as a reduction to additional paid in capital upon the execution of an equity transaction. Deferred financing costs composed of facility, agency, and certain legal fees associated with issuing new debt, are amortized over the contractual term of the related agreement using the effective interest method. See Note 12 — Long-Term Debt.
(l) Cost of Sales. Cost of sales includes the cost of inventory sold during the period, including costs for manufacturing, inbound freight, receiving, inspection, warehousing, and internal transfers less vendor rebates. Costs associated with shipping and handling the Company's products are included in cost of sales. Purchasing costs and engineering and drafting costs are included in selling, general and administrative expense.
(m) Warranty. The Company sells a number of products and offers a number of warranties. The specific terms and conditions of these warranties vary depending on the product sold. The Company's warranty liabilities are undiscounted and adjusted for inflation based on third party actuarial estimates. Factors that affect the Company’s warranty liabilities include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded based on historical experience and the Company periodically adjusts these provisions to reflect actual experience. Warranty costs are included within cost of goods sold. The Company assesses the adequacy of the recorded warranty claims and adjusts the amounts as necessary. Separately, upon the sale of a weathertightness warranty in the Commercial segment, the Company records the resulting revenue as deferred revenue, which is included in other accrued expenses and other long-term liabilities on the consolidated balance sheets depending on when the revenues are expected to be recognized. See Note 11 — Warranty.
(n) Insurance. Group medical insurance is purchased through Blue Cross Blue Shield (“BCBS”). The plans include a Preferred Provider Organization Plan (“PPO”) and a Consumer Driven Health Plan (“CDHP”). These plans are managed-care plans utilizing networks to achieve discounts through negotiated rates with the providers within these networks. The claims incurred under these plans are self-funded for the first $500,000 of each claim. The Company purchases individual stop loss reinsurance to limit the claims liability to $500,000 per claim. BCBS administers all claims, including claims processing, utilization review and network access charges.
Insurance is purchased for workers compensation and employer liability, general liability, property and auto liability/auto physical damage. The Company utilizes either deductibles or self-insurance retentions (“SIR”) to limit the exposure to catastrophic loss. The workers compensation insurance has a $250,000 per-occurrence deductible. The property and auto liability insurances have per-occurrence deductibles of $500,000 and $250,000, respectively. The general liability insurance has a $1,000,000 SIR. Umbrella insurance coverage is purchased to protect us against claims that exceed the Company's per-occurrence or aggregate limits set forth in the Company's respective policies. All claims are adjusted utilizing a third-party claims administrator and insurance carrier claims adjusters.
Each reporting period, the Company records the costs of its health insurance plan, including paid claims, an estimate of the change in incurred but not reported (“IBNR”) claims, taxes and administrative fees, when applicable, (collectively the “Plan Costs”) as general and administrative expenses on the consolidated statements of operations. The estimated IBNR claims are based upon (i) a recent average level of paid claims under the plan, (ii) an estimated lag factor and (iii) an estimated growth factor to provide for those claims that have been incurred but not yet reported and paid. The Company uses an actuary to determine the claims lag and estimated liability for IBNR claims.
For workers’ compensation costs, the Company monitors the number of accidents and the severity of such accidents to develop appropriate estimates for expected costs to provide both medical care and indemnity benefits, when applicable, for the period of time that an employee is incapacitated and unable to work. These accruals are developed using independent third-party actuarial estimates of the expected cost for medical treatment, and length of time an employee will be unable to work based on industry statistics for the cost of similar disabilities, to include statutory impairment ratings. For general liability and automobile claims, accruals are developed based on independent third-party actuarial estimates of the expected cost to resolve each claim, including damages and defense costs, based on legal and industry trends and the nature and severity of the claim. Accruals also include estimates for IBNR claims, and taxes and administrative fees, when applicable. Each reporting period, the Company records the costs of our workers’ compensation, general liability and automobile claims, including paid claims, an estimate of the change in IBNR claims, taxes and administrative fees as general and administrative expenses on the consolidated statements of operations.
(o) Advertising Costs. Advertising costs are expensed as incurred. Advertising expense was $28.6 million, $9.3 million, $7.1 million and $3.1 million in fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, respectively.
(p) Impairment of Long-Lived Assets. The Company assesses impairment of property, plant and equipment at an asset group level in accordance with the provisions of ASC Topic 360, Property, Plant and Equipment. The Company assesses the recoverability of the carrying amount of property, plant and equipment if certain events or changes in circumstances indicate that the carrying value of such asset groups may not be recoverable, such as a significant decrease in market value of the asset groups or a significant change in our business conditions. If it is determined that the carrying value of an asset group is not recoverable based on expected undiscounted future cash flows, excluding interest charges, an impairment loss equal to the excess of the carrying amount of the asset group over its fair value is recorded. The fair value of an asset group is determined based on prices of similar assets adjusted for their remaining useful life.
(q) Share-Based Compensation. Compensation expense is recorded for restricted stock awards under the fair value method. Compensation expense for performance stock units (“PSUs”) is recorded based on the probable outcome of the performance conditions associated with the respective shares, as determined by management. The Company recorded pre-tax compensation expense relating to restricted stock awards, stock options and performance share unit awards of $14.1 million, $11.6 million, $10.2 million and $4.5 million for fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, respectively. Included in the share-based compensation expense during fiscal 2018 were accelerated awards of $3.6 million due to the retirement of the Company’s former CEO. See Note 8 — Share-Based Compensation.
(r) Foreign Currency Re-measurement and Translation. The functional currency for the Company's Mexico operations is the U.S. dollar. Adjustments resulting from the re-measurement of the local currency financial statements into the U.S. dollar functional currency, which uses a combination of current and historical exchange rates, are included in net income (loss) in the current period. Net foreign currency re-measurement gains (losses) were $0.9 million, $(0.3) million and $(0.1) million for fiscal 2019 and 2017, and the transition period ended December 31. 2018, respectively. For fiscal 2018, the net foreign currency re-measurement gain (loss) was insignificant.
The functional currency for the Company's Canadian operations is the Canadian dollar. Translation adjustments resulting from translating the functional currency financial statements into U.S. dollar equivalents are reported separately in accumulated other comprehensive loss, net in stockholders’ equity. The net foreign currency gains (losses) included in net income (loss) for fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, were $1.2 million, $(0.2) million, $0.8 million and $(1.6) million, respectively. Net foreign currency translation adjustments, net of tax, and included in other comprehensive income (loss) were $3.2 million, $(0.1) million, $0.2 million and $(4.2) million for the fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, respectively.
(s) Contingencies. The Company establishes reserves for estimated loss contingencies and unasserted claims when it believes a loss is probable and the amount of the loss can be reasonably estimated. The Company's contingent liability reserves are related primarily to litigation and environmental matters. Revisions to contingent liability reserves are reflected in income in the period in which there are changes in facts and circumstances that affect our previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon assumptions and estimates regarding the probable outcome of the matter. The Company estimates the probability by evaluating historical precedent as well as the specific facts relating to each particular contingency (including the opinion of outside advisors, professionals and experts). Should the outcome differ from the assumptions and estimates or other events result in a material adjustment to the accrued estimated reserves, revisions to the estimated reserves for contingent liabilities would be required and would be recognized in the period the new information becomes known.
(t) Income taxes. The determination of the Company's provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The amount recorded in our consolidated financial statements reflects estimates of final amounts due to timing of completion and filing of actual income tax returns. Estimates are required with respect to, among other things, the appropriate state income tax rates used in the various states in which we and our subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards for federal, state, and foreign income tax purposes and valuation allowances required, if any, for tax assets that may not be realized in the future. The Company establishes reserves when, despite our belief that our tax return positions are fully supportable, certain positions could be challenged, and the positions may not be fully sustained. The Company's provision for income taxes reflects a combination of income earned and taxed in the various U.S. federal and state, Canadian federal and provincial, Mexican federal and other jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company considers all available evidence, both positive and negative, in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence.
(u) Reclassifications. Certain reclassifications have been made to the prior period amounts in the consolidated cash statements of cash flows and notes to the consolidated financial statements to conform to the current presentation. The net effect of these reclassifications was not material to the consolidated financial statements.
(v) Acquisitions. The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. If the fair value of the acquired assets exceeds the purchase price the difference is recorded as a bargain purchase in other income (expense). Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. As a result, during the measurement period, which may be up to one year from the acquisition date, material adjustments must be reflected in the comparative consolidated financial statements in the period in which the adjustment amount will be determined. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Newly acquired entities are included in our results from the date of their respective acquisitions.
3. ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. Effective January 1, 2019, the Company adopted the guidance initially applying the standard to leases existing at, or entered into after, the January 1, 2019 adoption date. The Company has elected only the package of three transition practical expedients available under the new standard. The short-term lease recognition exemption has been elected for all leases that qualify as well as the practical expedient to not separate lease and non-lease components for all leases other than leases of durable tooling.
The adoption of the new standard resulted in the recognition of additional operating liabilities of $304.1 million with corresponding right-of-use (“ROU”) assets of $304.1 million, based on the present value of the remaining minimum rental payments. The Company recognized no adjustment to the opening balance of accumulated deficit as of January 1, 2019. The new standard also provides for practical expedients for an entity’s ongoing accounting. Additional disclosures on leases are included in Note 7 — Leases.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software—General (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. Effective January 1, 2019, the Company early adopted this guidance on a prospective basis. The application of ASU 2018-15 did not have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as subsequently amended. ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company performed an assessment of the differences between the new revenue standard and current accounting practices. As part of our implementation process, the Company identified significant revenue streams and evaluated a sample of contracts within each significant revenue stream in order to determine the effect of the standard on our revenue recognition practices. The Company completed this evaluation and have established new policies, procedures, and internal controls in our adoption of the new revenue standard. The Company adopted this guidance on a modified retrospective basis, pursuant to which we recorded a $2.6 million adjustment to increase the opening balance of accumulated deficit as of October 29, 2018 (the first day of the Transition Period) for the impact of applying the new revenue standard. The adjustment related to changes in the timing of revenue recognition for our weathertightness warranties in our Commercial segment. Additional disaggregated revenue disclosures are included in Note 1 — Summary of Significant Accounting Policies.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight cash flow classification issues with the objective of reducing differences in practice. The Company adopted this guidance on a retrospective basis in the Transition Period. The application of ASU 2016-15 did not have a material impact on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The Company adopted this guidance on a modified retrospective basis, pursuant to which the Company recorded a $0.7 million adjustment to increase the opening balance of accumulated deficit as of October 29, 2018 (the first day of the Transition Period) for the impact of applying the new standard.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The Company adopted this guidance on a retrospective basis in the Transition Period. The adoption of this guidance resulted in restricted cash activity previously included in financing activities on the consolidated statement of cash flows to be included as part of the beginning and ending balances of cash and cash equivalents and restricted cash in the Company's consolidated statements of cash flows.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line items that include the service cost. The Company adopted this guidance in the Transition Period on a retrospective basis to adopt the requirement for separate presentation of the income statement service cost and other components, and on a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The adoption of ASU 2017-07 did not have a material impact on the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity on the accounting for modifications of stock-based awards. The Company adopted this guidance on a prospective basis in the Transition Period for share-based payment awards modified on or after the adoption date. The adoption of ASU 2017-09 did not have a material impact on the consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU’s objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance on a prospective basis for fiscal 2019. The adoption of ASU 2017-12 did not have a material impact on the consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires an entity to measure all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now incorporate forward-looking information based on expected losses to estimate credit losses. ASU 2016-13 will be effective for our fiscal year ending December 31, 2020, including interim periods within that fiscal year. The Company is evaluating the impact that the adoption of this ASU will have on our consolidated financial position, result of operations and cash flows and does not expect it to be material.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for fair value measurements under ASC 820, Fair Value Measurement. The Company will be required to adopt this guidance retrospectively in the annual and interim periods for our fiscal year ending December 31, 2020, with early adoption permitted. The Company is evaluating the impact of adopting this guidance.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which removes disclosures no longer considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. The Company will be required to adopt this guidance for our fiscal year ending December 31, 2020, with early adoption permitted. Certain provisions are applied prospectively while others are applied retrospectively. The Company is evaluating the impact of adopting this guidance.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also improves consistent application of and simplifies generally accepted accounting principles ("GAAP") for other areas of Topic 740 by clarifying and amending existing guidance. The Company will be required to adopt this guidance in the annual and interim periods for our fiscal year ending December 31, 2021, with early adoption permitted. The Company is evaluating the impact of adopting this guidance.
Additionally, there were various other accounting standards and interpretations issued that the Company has not yet been required to adopt, none of which is expected to have a material impact on the Company’s consolidated financial statements going forward.
4. ACQUISITIONS
Environmental Stoneworks
On January 12, 2019, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Environmental Materials, LLC, a Delaware limited liability company (“Environmental Stoneworks” or “ESW”), the Members of Environmental Materials, LLC (the “Sellers”) and Charles P. Gallagher and Wayne C. Kocourek, solely in their capacity as the Seller Representative (as defined in the Purchase Agreement), pursuant to which, on February 20, 2019, the Company’s wholly-owned subsidiary, Ply Gem Industries, Inc., purchased from the Sellers 100% of the outstanding limited liability company interests of Environmental Stoneworks (the “Environmental Stoneworks Acquisition”) for total consideration of $182.6 million, subject to certain post-closing adjustments. The transaction was financed through borrowings under the Company’s asset-based revolving credit facility.
The Environmental Stoneworks Acquisition, when combined with the Company’s existing stone businesses, positions the Company as a market leader in stone veneer. The Company accounted for the transaction as an acquisition in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of Environmental Stoneworks based upon fair values as of the closing date.
The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
Restricted cash
|
|
|
$
|
3,379
|
|
|
Accounts receivable
|
|
|
17,134
|
|
|
Inventories
|
|
|
13,062
|
|
|
Prepaid expenses and other current assets
|
|
|
3,677
|
|
|
Property, plant and equipment
|
|
|
14,295
|
|
|
Lease right-of-use assets
|
|
|
11,372
|
|
|
Intangible assets (trade names/customer relationships)
|
|
|
91,170
|
|
|
Goodwill
|
|
|
61,767
|
|
|
Other assets
|
|
|
157
|
|
|
Total assets acquired
|
|
|
216,013
|
|
|
Liabilities assumed:
|
|
|
|
Accounts payable
|
|
|
5,910
|
|
|
Other accrued expenses
|
|
|
12,725
|
|
|
Lease liabilities
|
|
|
11,365
|
|
|
Other long-term liabilities
|
|
|
3,450
|
|
|
Total liabilities assumed
|
|
|
33,450
|
|
|
Net assets acquired
|
|
|
$
|
182,563
|
|
The $61.8 million of goodwill was allocated to the Siding segment and is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.
During the year ended December 31, 2019, the Company incurred $1.5 million of acquisition-related costs for Environmental Stoneworks, which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.
The final acquisition accounting allocation for the Environmental Stoneworks Acquisition remains subject to further adjustments. The specific accounts subject to ongoing acquisition accounting adjustments include accounts receivable, inventories, prepaid expenses and other current assets, goodwill, intangibles, accounts payable, accrued expenses, accrued warranties and other liabilities. Therefore, the measurement period remained open as of December 31, 2019, and the preliminary acquisition accounting allocation detailed above is subject to further adjustment. The Company anticipates completing these acquisition accounting adjustments during the first quarter of fiscal 2020.
Ply Gem Merger
On July 17, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ply Gem Parent, LLC (“Ply Gem”), and for certain limited purposes as set forth in the Merger Agreement, Clayton, Dubilier & Rice,
LLC (“CD&R”), pursuant to which, at the closing of the merger, Ply Gem would be merged with and into NCI, with NCI continuing its existence as a corporation organized under the laws of the State of Delaware (the “Merger”). On November 15, 2018, at a special meeting of NCI shareholders, NCI’s shareholders approved, among other items, the Merger Agreement and the issuance in the Merger of 58,709,067 shares of NCI common stock, par value $0.01 per share (“NCI Common Stock”) in the aggregate, on a pro rata basis, to the holders of all of the equity interests in Ply Gem (the “Stock Issuance”), representing approximately 47% of the total number of shares of NCI Common Stock outstanding following the consummation of the Merger on November 16, 2018 (the “Closing Date”). The total value of shares of NCI Common Stock issued pursuant to the Stock Issuance was approximately $713.9 million based on the number of shares issued multiplied by the NCI Common Stock closing share price of $12.16 on the Closing Date. There are approximately 57,103 shares of NCI Common Stock of the original 58,709,067 that have not yet been issued pending holder identification and have been accrued as purchase consideration within other current liabilities in the consolidated balance sheet at December 31, 2019. For accounting and legal purposes, NCI was the accounting and legal acquirer of Ply Gem as of the Closing Date and Ply Gem’s results have been included within NCI from the Closing Date.
Ply Gem is a leading manufacturer of exterior building products in North America, operating in two segments: Siding and Windows. These two segments produce a comprehensive product line of vinyl siding, designer accents, cellular PVC trim, vinyl fencing, vinyl railing, stone veneer, and vinyl windows and doors used in both the new construction market and the home repair and remodeling market in the United States and Canada. Vinyl building products have the leading share of sales volume in siding and windows in the United States. Ply Gem also manufactures vinyl and aluminum soffit and siding accessories, aluminum trim coil, wood windows, aluminum windows, vinyl and aluminum-clad windows and steel and fiberglass doors, enabling Ply Gem to bundle complementary and color-matched products and accessories with our core products.
Ply Gem strategically fits into NCI’s existing footprint and broadens its service offering to existing and new customers within the building products industry. The Company accounted for the Merger as an acquisition in accordance with the provisions of Accounting Standards Codification 805, Business Combinations, which results in a new valuation for the assets and liabilities of Ply Gem based upon fair values as of the Closing Date.
In connection with the Merger, on November 16, 2018, NCI assumed (i) the obligations of the company formerly known as Ply Gem Midco, Inc. (“Ply Gem Midco”), a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the Current Cash Flow Credit Agreement (as defined below), (ii) the obligations of Ply Gem Midco as parent borrower under the Current ABL Credit Agreement (as defined below) and (iii) the obligations of Ply Gem Midco as issuer under the Current Indenture (as defined below).
On April 12, 2018, Ply Gem Midco entered into a Cash Flow Credit Agreement (the “Current Cash Flow Credit Agreement”), by and among Ply Gem Midco, JP Morgan Chase Bank, N.A., as administrative agent and collateral agent (the “Cash Flow Agent”), and the several banks and other financial institutions from time to time party thereto. As of November 16, 2018, immediately prior to consummation of the Merger, the Current Cash Flow Credit Agreement provided for (i) a term loan facility (the “Current Term Loan Facility”) in an original aggregate principal amount of $1,755.0 million and (ii) a cash flow-based revolving credit facility (the “Current Cash Flow Revolver” and together with the Current Term Loan Facility, the “Current Cash Flow Facilities”) of up to $115.0 million. On November 16, 2018, Ply Gem Midco entered into a Lender Joinder Agreement, by and among Ply Gem Midco, the additional commitment lender party thereto and the Cash Flow Agent, which amended the Current Cash Flow Credit Agreement in order to, among other things, increase the aggregate principal amount of the Current Term Loan Facility by $805.0 million (the “Incremental Term Loans”). Proceeds of the Incremental Term Loans were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement (each as defined below) and (c) repay $325.0 million of borrowings outstanding under the Current ABL Facility (as defined below). On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current Cash Flow Facilities, and NCI became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Current Cash Flow Facilities. The Current Term Loan Facility amortizes in nominal quarterly installments equal to 1 percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity of the Current Term Loan Facility on April 12, 2025. There are no amortization payments under the Current Cash Flow Revolver, and all borrowings under the Current Cash Flow Revolver mature on April 12, 2023.
On April 12, 2018, Ply Gem Midco and certain subsidiaries of Ply Gem Midco entered into an ABL Credit Agreement (the “Current ABL Credit Agreement”), by and among Ply Gem Midco, the subsidiary borrowers from time to time party thereto, UBS AG, Stamford Branch, as administrative agent and collateral agent (the “ABL Agent”), and the several banks and other financial institutions from time to time party thereto, which provided for an asset-based revolving credit facility (the “Current ABL Facility”) of up to $360.0 million, consisting of (i) $285.0 million available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii) $75.0 million available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). On October 15, 2018, Ply Gem Midco entered into Amendment No. 2 to the Current ABL Credit Agreement, by and among Ply Gem Midco, the incremental lender party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by $36.0 million to $396.0 million overall, and with the (x) ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million. On November 16, 2018, Ply Gem Midco entered into Amendment No. 4 to the Current ABL Credit Agreement, by and among Ply Gem Midco, the incremental lenders party thereto and the ABL Agent, which amended the Current ABL Credit Agreement in order to, among other things, increase the aggregate commitments under the Current ABL Facility by $215.0 million (the “Incremental ABL Commitments”) to $611.0 million overall, and with the (x) ABL U.S. Facility being increased from $313.5 million to approximately $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to approximately $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and NCI became the Parent Borrower (as defined in the Current ABL Credit Agreement) under the Current ABL Facility. The Company and, at the Company’s option, certain of the Company’s subsidiaries are the borrowers under the Current ABL Facility. As of November 16, 2018, and following consummation of the Merger, (a) Ply Gem Industries, Inc., Atrium Windows and Doors, Inc., NCI Group, Inc. and Robertson-Ceco II Corporation were U.S. subsidiary borrowers under the Current ABL Facility, and (b) Gienow Canada Inc., Mitten Inc., North Star Manufacturing (London) Ltd. and Robertson Building Systems Limited were Canadian borrowers under the Current ABL Facility. All borrowings under the Current ABL Facility mature on April 12, 2023.
On April 12, 2018, Ply Gem Midco issued $645.0 million aggregate principal amount of 8.00% Senior Notes due 2026 (the “8.00% Senior Notes”). The 8.00% Senior Notes were issued pursuant to an Indenture, dated as of April 12, 2018 (as supplemented from time to time, the “Current Indenture”), by and among Ply Gem Midco, as issuer, the subsidiary guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee. On November 16, 2018, in connection with the consummation of the Merger, the Company entered into a supplemental indenture and assumed the obligations of Ply Gem Midco as issuer under the Current Indenture and the 8.00% Senior Notes. The 8.00% Senior Notes bear interest at 8.00% per annum and will mature on April 15, 2026. Interest is payable semi-annually in arrears on April 15 and October 15.
On November 16, 2018, in connection with the incurrence by Ply Gem Midco of the Incremental Term Loans and the obtaining by Ply Gem Midco of the Incremental ABL Commitments, following consummation of the Merger, the Company (a) terminated all outstanding commitments and repaid all outstanding amounts under the Term Loan Credit Agreement, dated as of February 8, 2018 (the “Pre-merger Term Loan Credit Agreement”), by and among the Company, as borrower, the several banks and other financial institutions from time to time party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, and (b) terminated all outstanding commitments and repaid all outstanding amounts under the ABL Credit Agreement, dated as of February 8, 2018 (the “Pre-merger ABL Credit Agreement”), by and among NCI Group, Inc. and Robertson-Ceco II Corporation, as borrowers, the Company, as a guarantor, the other borrowers from time to time party thereto, the several banks and other financial institutions from time to time party thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent. Outstanding letters of credit under the Pre-merger ABL Credit Agreement were cash collateralized.
In connection with the termination and repayment of the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement, the Company also terminated (i) the Term Loan Guarantee and Collateral Agreement, dated as of February 8, 2018, made by the Company and certain of its subsidiaries, in favor of Credit Suisse AG, Cayman Islands Branch, as collateral agent, (ii) the ABL Guarantee and Collateral Agreement, dated as of February 8, 2018, made by the Company and certain of its subsidiaries, in favor of Wells Fargo Bank, National Association, as collateral agent, and (iii) the Intercreditor Agreement, dated as of February 8, 2018, between Credit Suisse AG, Cayman Islands Branch and Wells Fargo Bank, National Association, and acknowledged by the Company and certain of its subsidiaries.
Purchase Price Allocation
The Company’s total purchase consideration in the Merger was equal to $728.9 million and is comprised of the Stock Issuance of $713.9 million and a cash payment of $15.0 million by the Company to settle certain third-party fees and expenses incurred by Ply Gem. The Company determined the fair values of the tangible and intangible assets acquired and the liabilities assumed in the Merger, and recorded goodwill based on the excess of fair value of the acquisition consideration over such fair values, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
Cash
|
|
|
$
|
102,121
|
|
|
Accounts receivable
|
|
|
345,601
|
|
|
Inventories
|
|
|
301,388
|
|
|
Prepaid expenses and other current assets
|
|
|
52,923
|
|
|
Property, plant and equipment
|
|
|
364,708
|
|
|
Intangible assets (trade names/customer relationships)
|
|
|
1,720,000
|
|
|
Goodwill
|
|
|
1,462,958
|
|
|
Other assets
|
|
|
4,868
|
|
|
Total assets acquired
|
|
|
4,354,567
|
|
|
Liabilities assumed:
|
|
|
|
Accounts payable
|
|
|
139,955
|
|
|
Tax receivable agreement liability
|
|
|
47,355
|
|
|
Other accrued expenses (inclusive of $23.6 million for current warranty liabilities)
|
|
|
244,622
|
|
|
Debt (inclusive of current portion)
|
|
|
2,674,767
|
|
|
Other long-term liabilities ($163.7 million for accrued long-term warranty)
|
|
|
163,668
|
|
|
Deferred income taxes
|
|
|
323,308
|
|
|
Other long-term liabilities
|
|
|
31,947
|
|
|
Total liabilities assumed
|
|
|
3,625,622
|
|
|
Net assets acquired
|
|
|
$
|
728,945
|
|
At the acquisition date, $747.4 million of goodwill was allocated to the Siding segment and $715.6 million was allocated to the Windows segment and none of the goodwill is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.
Unaudited Pro Forma Financial Information
During the year ended December 31, 2019, Environmental Stoneworks contributed net sales of $150.5 million and net income of $8.7 million which has been included within the Company’s consolidated statement of operations. The following table provides unaudited supplemental pro forma results for Cornerstone, prepared in accordance with ASC 805, for the years ended December 31, 2019 and October 28, 2018 as if the Environmental Stoneworks and Ply Gem acquisitions had occurred on October 30, 2017 (beginning of the year ended October 28, 2018) (in thousands except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
Net sales
|
|
|
|
|
$
|
4,905,843
|
|
|
$
|
5,082,205
|
|
|
Net income (loss) applicable to common shares
|
|
|
|
|
15,176
|
|
|
(182,778)
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
0.12
|
|
|
$
|
(1.46)
|
|
|
Diluted
|
|
|
|
|
$
|
0.12
|
|
|
$
|
(1.46)
|
|
The unaudited supplemental pro forma financial information was prepared based on the historical information of Cornerstone, Ply Gem and Environmental Stoneworks. Material pro forma adjustments related to the Environmental Stoneworks and Ply Gem acquisitions include approximately $62.6 million of certain acquisition and compensation costs and $37.9 million of non-cash charges of purchase price allocated to inventories, which were reflected in the pro forma results as if they were incurred on October 30, 2017. Other material pro forma adjustments include adjustments to depreciation and amortization expense and interest expense related to the Environmental Stoneworks and Ply Gem acquisitions.
The unaudited supplemental 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 two acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the Environmental Stoneworks and Ply Gem acquisitions occurred on October 30, 2017 or of future results.
5. RESTRUCTURING
The Company developed restructuring plans in the fourth quarter of the fiscal year ended November 1, 2015 (“fiscal 2015”) primarily to improve selling, general and administrative (“SG&A”) and manufacturing cost efficiency and to optimize our combined manufacturing footprint given the Company’s acquisitions, dispositions and restructuring efforts. Under these plans, the Company incurred restructuring charges of $1.5 million, which included a net gain of $1.2 million on the sale of facilities, $4.7 million and $1.3 million during fiscal 2018, 2017 and the transition period ended December 31, 2018, respectively, in the Commercial segment. As of December 31, 2018, the Company was substantially complete with the fiscal 2015 restructuring plans initiated by the Company before the Merger.
The Company has various new initiatives and programs in place within its business units to further reduce SG&A, manufacturing costs and to optimize our combined manufacturing footprint given the Merger. The following table summarizes our restructuring plan costs and charges related to the restructuring plans for the year ended December 31, 2019, which are recorded in restructuring and impairment charges in the Company’s consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
Incurred
To Date
(since
inception)
|
|
|
|
|
|
|
General severance
|
|
|
$
|
8,485
|
|
|
Plant closing severance
|
|
|
1,173
|
|
|
Asset impairments
|
|
|
2,963
|
|
|
Loss on sale of facilities, net
|
|
|
64
|
|
|
Other restructuring costs
|
|
|
5,375
|
|
|
Total restructuring costs
|
|
|
$
|
18,060
|
|
The following table summarizes the Company's severance liability and cash payments made pursuant to the restructuring plans from inception through December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Severance
|
|
Plant Closing
Severance
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
2,418
|
|
|
$
|
—
|
|
|
$
|
2,418
|
|
|
Costs incurred
|
8,485
|
|
|
1,173
|
|
|
9,658
|
|
|
Cash payments
|
(8,240)
|
|
|
(1,173)
|
|
|
(9,413)
|
|
|
Balance, December 31, 2019
|
$
|
2,663
|
|
|
$
|
—
|
|
|
$
|
2,663
|
|
These severance liabilities are included within other accrued expenses on the consolidated balance sheets.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's goodwill balance and changes in the carrying amount of goodwill by segment follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Siding
|
|
Windows
|
|
Total
|
|
Balance, October 28, 2018
|
$
|
148,291
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
148,291
|
|
|
Goodwill recognized from Merger
|
—
|
|
|
854,606
|
|
|
639,447
|
|
|
1,494,053
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
—
|
|
|
(1,220)
|
|
|
(913)
|
|
|
(2,133)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
$
|
148,291
|
|
|
$
|
853,386
|
|
|
638,534
|
|
|
$
|
1,640,211
|
|
|
Goodwill recognized from Environmental Stoneworks Acquisition
|
—
|
|
|
61,767
|
|
|
—
|
|
|
61,767
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation
|
—
|
|
|
(655)
|
|
|
(634)
|
|
|
(1,289)
|
|
|
Purchase accounting adjustments
|
—
|
|
|
(45,607)
|
|
|
14,512
|
|
|
(31,095)
|
|
|
Reallocation of goodwill between segments for purchase accounting
|
—
|
|
|
(61,611)
|
|
|
61,611
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
$
|
148,291
|
|
|
$
|
807,280
|
|
|
$
|
714,023
|
|
|
$
|
1,669,594
|
|
In accordance with ASC Topic 350, Intangibles — Goodwill and Other, goodwill is tested for impairment at least annually at the reporting unit level, which is defined as an operating segment or a component of an operating segment that constitutes a business for which financial information is available and is regularly reviewed by management. The Company has six reporting units for the purpose of allocating goodwill and the subsequent testing of goodwill for impairment. The Commercial segment has four reporting units (Engineered Building Systems, Metal Components, Insulated Metal Panels, and Metal Coil Coating) and the Siding and Windows segments each have one reporting unit.
At the beginning of the fourth quarter of each fiscal year, the Company performs an annual impairment assessment of goodwill and indefinite-lived intangible assets. The Company measures the goodwill impairment as the amount by which the reporting unit's carrying value exceeds its fair value not to exceed the carrying amount of goodwill in a reporting unit. To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies. The income valuation methodology uses the fair value of the cash flows that the reporting unit can be expected to generate in the future. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate. The Company also utilizes the market valuation method to estimate the fair value of the reporting units by utilizing comparable public company multiples. These comparable public company multiples are then applied to the reporting unit’s financial performance. The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable. Since each approach has its merits, the Company equally weighs the approaches to balance the internal and external factors affecting the Company’s fair value. Since the Merger occurred on November 16, 2018, the Siding and Windows reporting units were marked to fair value at the Merger date and the goodwill was adjusted accordingly for the Merger consideration. The annual impairment test occurred less than a year from the Merger date resulting in the Siding and Windows reporting units along with the Metal Coil Coating report units having fair values that exceeded their carrying values by approximately 12%, 3% and 8%, respectively.
The Company’s fair value estimates of its reporting units are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples. In order to accurately forecast future cash flows, the Company utilized its weighted average cost of capital and its long-term growth rate to derive the appropriate capitalization rate used in the terminal value calculation. The Company utilized these fair value estimate assumptions during the impairment analysis conducted during the year ended December 31, 2019.
The Company provides no assurance that: 1) valuation multiples will not decline, 2) discount rates will not increase, or 3) the earnings, book values or projected earnings and cash flows of the Company’s reporting units will not decline. The Company will continue to analyze changes to these assumptions in future periods. The Company will also continue to evaluate goodwill during future periods and declines in the residential housing, remodeling, and commercial construction markets or unfavorable performance by the Company in these markets could result in future goodwill impairments.
Our fiscal 2017 annual goodwill impairment testing indicated an impairment as the carrying value of CENTRIA’s coil coating operations, included in the Commercial segment, exceeded its fair value. As a result, the Company recorded a non-cash charge of $6.0 million in goodwill impairment in the Company's consolidated statements of operations for the year ended October 29, 2017.
The table that follows presents the major components of intangible assets as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Life (Years)
|
|
|
|
Weighted Average Amortization Period (Years)
|
Cost
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/Trade names/other(1)
|
5
|
–
|
15
|
|
9
|
$
|
252,942
|
|
|
$
|
(38,010)
|
|
|
$
|
214,932
|
|
|
Customer lists and relationships
|
9
|
–
|
20
|
|
11
|
1,737,060
|
|
|
(211,292)
|
|
|
1,525,768
|
|
|
Total intangible assets
|
|
|
|
|
10
|
$
|
1,990,002
|
|
|
$
|
(249,302)
|
|
|
$
|
1,740,700
|
|
|
(1) During fiscal 2019, the Company began amortization of trade names previously classified as indefinite-lived over an eight-year period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Life (Years)
|
|
|
|
Weighted Average Amortization Period (Years)
|
Cost
|
|
Accumulated Amortization
|
|
Net Carrying Value
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/Trade names
|
8
|
–
|
15
|
|
10
|
$
|
226,967
|
|
|
$
|
(15,483)
|
|
|
$
|
211,484
|
|
|
Customer lists and relationships
|
9
|
–
|
20
|
|
11
|
1,503,410
|
|
|
(58,448)
|
|
|
1,444,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
|
|
13,455
|
|
|
—
|
|
|
13,455
|
|
|
Total intangible assets
|
|
|
|
|
11
|
$
|
1,743,832
|
|
|
$
|
(73,931)
|
|
|
$
|
1,669,901
|
|
Intangible assets are amortized on a straight-line basis or a basis consistent with the expected future cash flows over their expected useful lives. Amortization expense of intangibles was $177.6 million, $9.6 million, $9.6 million and $20.1 million in fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, respectively. The Company expects to recognize amortization expense over the next five fiscal years as follows (in thousands):
|
|
|
|
|
|
|
|
2020
|
$
|
179,435
|
|
|
2021
|
179,130
|
|
|
2022
|
178,820
|
|
|
2023
|
178,802
|
|
|
2024
|
177,374
|
|
In accordance with ASC Topic 350, Intangibles — Goodwill and Other, the Company evaluates the remaining useful life of intangible assets on an annual basis. The Company also reviews finite-lived intangible assets for impairment when events or changes in circumstances indicate the carrying values may not be recoverable in accordance with ASC Topic 360, Property, Plant and Equipment.
7. LEASES
As described in Note 2 — Summary of Significant Accounting Policies, effective January 1, 2019, the Company adopted ASU 2016-02, Leases, applying the standard to leases existing at the effective date. For arrangements entered into following the transition date, applicability of the standard is determined at inception.
Weighted average information about the Company’s lease portfolio as of December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
5.9 years
|
|
Weighted-average IBR
|
6.13
|
%
|
Operating lease costs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Operating lease costs
|
|
|
Fixed lease costs
|
$
|
102,767
|
|
|
Variable lease costs(1)
|
107,357
|
|
|
|
|
|
(1) Includes short-term lease costs, which are immaterial.
|
|
Cash and non-cash activities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows for operating leases
|
$
|
109,274
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
396,008
|
|
Future minimum lease payments under non-cancelable leases as of December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
2020
|
$
|
89,649
|
|
|
2021
|
78,970
|
|
|
2022
|
64,046
|
|
|
2023
|
37,049
|
|
|
2024
|
27,793
|
|
|
Thereafter
|
82,345
|
|
|
Total future minimum lease payments
|
379,852
|
|
|
Less: interest
|
63,644
|
|
|
Present value of future minimum lease payments
|
$
|
316,208
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Current portion of lease liabilities
|
$
|
72,428
|
|
|
Long-term portion of lease liabilities
|
243,780
|
|
|
Total
|
$
|
316,208
|
|
8. SHARE-BASED COMPENSATION
Our 2003 Long-Term Stock Incentive Plan, as amended (the “Incentive Plan”), is an equity-based compensation plan that allows us to grant a variety of types of awards, including stock options, restricted stock awards, stock appreciation rights, cash awards, phantom stock awards, restricted stock unit awards ("RSUs") and long-term incentive awards with performance conditions (“performance share units” or "PSUs"). Awards are generally granted once per year, with the amounts and types of awards determined by the Compensation Committee of our Board of Directors (the “Committee”). In connection with the Merger, on November 16, 2018 awards were granted to certain senior executives and key employees (the “Founders Awards”), which included stock options, RSUs, and PSUs. A portion of the Founders Awards was not granted under the Incentive Plan but was instead granted pursuant to a separate equity-based compensation plan, the Long-Term Incentive Plan consisting of award agreements for select Founders Awards. However, these awards were subject to the same terms and provisions as awards of the same type granted under the Incentive Plan.
As of December 31, 2019, and for all periods presented, the Founders Awards and our share-based awards under the Incentive Plan have consisted of RSUs, PSUs and stock option grants, none of which can be settled through cash payments, and Performance Share Awards, which are settled in cash. Both our stock options and restricted stock awards are subject only to vesting requirements based on continued employment at the end of a specified time period and typically vest in annual increments over three to five years or earlier upon death, disability or a change in control. Restricted stock awards do not vest upon attainment of a specified retirement age, as provided by the agreements governing such awards. The vesting of our Performance Share Awards is described below.
As a general rule, option awards terminate on the earlier of (i) 10 years from the date of grant, (ii) 60 days after termination of employment or service for a reason other than death, disability or retirement, or (iii) 180 days after death, disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Committee may approve. Awards may be paid in cash, shares of our Common Stock or a combination, in lump sum or installments and currently or by deferred payment, all as determined by the Committee.
Our time-based restricted stock awards are typically subject to graded vesting over a service period, which is three to five years. Our performance-based and market-based restricted stock awards are typically subject to cliff vesting at the end of the service period, which is typically three years. Our share-based compensation arrangements are equity classified and we recognize compensation cost for these awards on a straight-line basis over the requisite service period for each award grant. In the case of performance-based awards, expense is recognized based upon management’s assessment of the probability that such performance conditions will be achieved. Certain of our awards provide for accelerated vesting upon a change of control or upon termination without cause or for good reason.
A total of approximately 8,734,000 and 2,091,000 shares were available at December 31, 2019 and 2018, respectively, under the Incentive Plan for further grants of awards.
Our Board of Directors approved the treatment of existing awards as if a change in control had occurred, per the respective agreements governing each award. As such, on November 16, 2018, upon consummation of the Merger, certain awards granted in fiscal 2016 and earlier vested, resulting in the issuance of 0.5 million shares, net of shares withheld. Certain other PSUs that were issued in fiscal 2017 and fiscal 2018 converted to RSUs at 100% and continue to vest in accordance with the original schedule.
Founders Awards granted to our senior executives and certain key employees included options, RSUs and PSUs. The options and RSUs vest subject to continued employment 20% per year on the first through fifth anniversary of the award. Vesting of the PSUs is contingent upon the achievement of synergies captured from the Merger and continued employment during a three-year performance period beginning on the grant date. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. The PSUs vest pro rata if an executive’s employment terminates after 50% of the service period has passed and prior to the end of the performance period due to death, disability, or termination by the Company without cause or by the executive for good reason. If an executive’s employment terminates for any other reason prior to the end of the performance period, all outstanding unvested PSUs, whether earned or unearned, are forfeited and cancelled. If a change in control of the Company occurs, and the plan is not accepted by the successor entity, prior to the end of the performance period, the PSU payout is calculated and paid assuming that the maximum benefit had been achieved. If the plan is accepted, awards will continue to vest as RSUs with a double trigger acceleration upon termination by the Company without cause or by the executive for good reason. If an executive’s employment terminates due to death or disability while any of the restricted stock is unvested, then all of the unvested restricted stock shall become vested. If an executive’s employment is terminated by the Company without cause or by the executive for good reason, the unvested restricted stock is forfeited. If a change in control of the Company occurs, and the plan is not accepted by the successor entity, prior to the end of the performance period, the restricted stock fully vests. If the plan is accepted, awards will continue to vest with a double trigger acceleration upon termination by the Company without cause or by the executive for good reason. The fair value of the awards is based on the Company’s stock price as of the date of grant.
Stock Option Awards
The fair value of each option award is estimated as of the date of grant using a Black-Scholes-Merton option pricing formula. Expected volatility is based on normalized historical volatility of our stock over a preceding period commensurate with the expected term of the option. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend yield was not considered in the option pricing formula since we do not currently pay dividends on our Common Stock and have no current plans to do so in the future.
During fiscal 2019 and 2017, and the transition period ended December 31, 2018, we granted 359,873, 10,424 and 3,082,175 stock options, respectively, and the weighted average grant-date fair value of options granted during fiscal 2019 and 2017, and the transition period ended December 31, 2018 was $1.97, $6.59 and $5.19, respectively. We did not grant stock options during fiscal 2018.
The assumptions for the option awards granted in fiscal 2019 and 2017, and the transition period ended December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
2019
|
|
October 29,
2017
|
|
October 29, 2018 -
December 31, 2018
|
|
|
|
|
|
|
|
|
Volatility rate
|
39.87
|
%
|
|
42.63
|
%
|
|
37.26
|
%
|
|
Expected term (in years)
|
6.50
|
|
5.50
|
|
6.50
|
|
Risk-free interest rate
|
1.73
|
%
|
|
2.15
|
%
|
|
2.95
|
%
|
The following is a summary of stock option transactions during fiscal 2019, 2018 and 2017, and the transition period ended December 31. 2018 (in thousands, except weighted average exercise prices and weighted average remaining life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic
Value
|
|
Balance, October 30, 2016
|
508
|
|
|
$
|
10.24
|
|
|
|
|
|
|
Granted
|
11
|
|
|
15.70
|
|
|
|
|
|
|
Exercised
|
(183)
|
|
|
9.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 29, 2017
|
336
|
|
|
11.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
(115)
|
|
|
11.09
|
|
|
|
|
|
|
Cancelled
|
(6)
|
|
|
15.70
|
|
|
|
|
|
|
Balance, October 28, 2018
|
215
|
|
|
10.94
|
|
|
|
|
|
|
Granted
|
3,082
|
|
|
12.16
|
|
|
|
|
|
|
Balance, December 31, 2018
|
3,297
|
|
|
12.08
|
|
|
|
|
|
|
Granted
|
360
|
|
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(713)
|
|
|
12.16
|
|
|
|
|
|
|
Cancelled
|
(96)
|
|
|
9.17
|
|
|
|
|
|
|
Balance, December 31, 2019
|
2,848
|
|
|
$
|
11.22
|
|
|
8.7
|
|
$
|
1,383
|
|
|
Exercisable at December 31, 2019
|
669
|
|
|
$
|
11.39
|
|
|
7.8
|
|
$
|
277
|
|
The following summarizes additional information concerning outstanding options at December 31, 2019 (in thousands, except weighted average remaining life and weighted average exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
Number of
Options
|
|
Weighted Average
Remaining Life
|
|
Weighted Average
Exercise Price
|
|
403
|
|
|
8.7 years
|
|
$
|
5.26
|
|
|
2,445
|
|
|
8.7 years
|
|
12.21
|
|
|
2,848
|
|
|
8.7 years
|
|
$
|
11.22
|
|
The following summarizes additional information concerning options exercisable at December 31, 2019 (in thousands, except weighted average exercise prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
Number of
Options
|
|
Weighted Average
Remaining Life
|
|
Weighted Average
Exercise Price
|
|
115
|
|
|
6.7 years
|
|
$
|
6.74
|
|
|
554
|
|
|
8.1 years
|
|
12.36
|
|
|
669
|
|
|
7.8 years
|
|
$
|
11.39
|
|
|
|
|
|
|
|
No options were exercised during fiscal 2019 and the transition period ended December 31, 2018. There were 115,424, and 182,923 options exercised during fiscal 2018 and 2017, respectively. Cash received from the option exercises was $1.3 million, and $1.7 million during fiscal 2018 and 2017, respectively. The total intrinsic value of options exercised in fiscal 2018 and 2017 was $0.8 million, and $1.4 million, respectively.
Restricted stock and performance awards
During fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, we granted time-based RSUs with a fair value of $3.3 million, $7.1 million, $4.5 million and $24.0 million, respectively.
During the fiscal years 2019, 2018 and 2017, and the transition period ended December 31, 2018, we granted PSUs with fair values of approximately $0.4 million, $3.8 million, $4.6 million and $7.1 million, respectively, to certain executives.
Restricted stock and performance award transactions during fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018 were as follows (in thousands, except weighted average grant prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock and Performance Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based
|
|
|
|
Performance-Based
|
|
|
|
Market-Based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Price
|
|
Number of
Shares(1)
|
|
Weighted
Average
Grant Price
|
|
Number of
Shares(1)
|
|
Weighted
Average
Grant Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 30, 2016
|
762
|
|
|
$
|
14.91
|
|
|
799
|
|
|
$
|
14.82
|
|
|
107
|
|
|
$
|
14.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
285
|
|
|
15.84
|
|
|
362
|
|
|
15.70
|
|
|
58
|
|
|
16.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
(392)
|
|
|
15.14
|
|
|
(165)
|
|
|
16.07
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(27)
|
|
|
14.41
|
|
|
(124)
|
|
|
15.88
|
|
|
(21)
|
|
|
11.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 29, 2017
|
628
|
|
|
$
|
15.21
|
|
|
872
|
|
|
$
|
14.76
|
|
|
144
|
|
|
$
|
15.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
367
|
|
|
19.37
|
|
|
281
|
|
|
19.65
|
|
|
44
|
|
|
19.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
(423)
|
|
|
15.67
|
|
|
(94)
|
|
|
17.07
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(64)
|
|
|
17.15
|
|
|
(183)
|
|
|
16.26
|
|
|
(43)
|
|
|
16.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2018
|
508
|
|
|
$
|
17.58
|
|
|
876
|
|
|
$
|
16.14
|
|
|
145
|
|
|
$
|
16.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
2,014
|
|
|
11.91
|
|
|
802
|
|
|
12.15
|
|
|
27
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
(277)
|
|
|
16.94
|
|
|
(640)
|
|
|
13.48
|
|
|
(104)
|
|
|
15.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
19.65
|
|
|
(1)
|
|
|
17.63
|
|
|
(68)
|
|
|
20.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
2,245
|
|
|
$
|
12.57
|
|
|
1,037
|
|
|
$
|
14.63
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
703
|
|
|
5.40
|
|
|
76
|
|
|
4.67
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
(586)
|
|
|
12.42
|
|
|
(234)
|
|
|
16.30
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(543)
|
|
|
11.00
|
|
|
(168)
|
|
|
13.09
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
1,819
|
|
|
$
|
10.32
|
|
|
711
|
|
|
$
|
13.38
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)The number of restricted stock shown reflects the shares that would be granted if the target level of performance is achieved. The number of shares actually issued may vary.
Share-Based Compensation Expense
Share-based compensation expense is recorded over the requisite service or performance period. For awards with performance conditions, the amount of share-based compensation expense recognized is based upon the probable outcome of the performance conditions, as defined and determined by management. With the adoption of ASU 2016-09 in the first quarter of fiscal 2018, we account for forfeitures of outstanding but unvested grants in the period they occur.
Share-based compensation expense recognized during fiscal 2019, 2018, 2017, and the transition period ended December 31, 2018 was $14.1 million, $11.6 million, $10.2 million and $4.5 million, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $3.7 million, $3.2 million, $4.0 million and $1.1 million in fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018, respectively. As of December 31, 2019, we do not have any amounts capitalized for share-based compensation cost in inventory or similar assets.
Unrecognized share-based compensation expense and weighted average period over which expense attributable to unvested awards will be recognized are as follows (in millions, except weighted average remaining years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
Unrecognized Share-Based Compensation Expense
|
|
Weighted Average Remaining Years
|
|
Stock options
|
$
|
10.1
|
|
|
3.9
|
|
Time-based restricted stock
|
17.9
|
|
|
3.5
|
|
Performance-based restricted stock
|
4.8
|
|
|
1.7
|
|
Total unrecognized share-based compensation expense
|
$
|
32.8
|
|
|
|
9. 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 income per common share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29, 2018 -
December 31, 2018
|
|
Numerator for Basic and Diluted Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
$
|
(15,390)
|
|
|
$
|
62,694
|
|
|
$
|
54,399
|
|
|
$
|
(76,190)
|
|
|
Denominator for Basic and Diluted Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
Weighted average basic number of common shares outstanding
|
125,576
|
|
|
66,260
|
|
|
70,629
|
|
|
107,813
|
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
Employee stock options
|
—
|
|
|
89
|
|
|
124
|
|
|
—
|
|
|
PSUs and Performance Share Awards
|
—
|
|
|
13
|
|
|
25
|
|
|
—
|
|
|
Weighted average diluted number of common shares outstanding
|
125,576
|
|
|
66,362
|
|
|
70,778
|
|
|
107,813
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
$
|
(0.12)
|
|
|
$
|
0.95
|
|
|
$
|
0.77
|
|
|
$
|
(0.71)
|
|
|
Diluted earnings (loss) per common share
|
$
|
(0.12)
|
|
|
$
|
0.94
|
|
|
$
|
0.77
|
|
|
$
|
(0.71)
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan securities excluded from dilution(1)
|
4,480
|
|
1
|
|
—
|
|
2,053
|
(1)Represents securities not included in the computation of diluted earnings per common share because their effect would have been anti-dilutive.
We calculate earnings per share using the “two-class” method, whereby unvested share-based payment awards that contain nonforfeitable 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 fiscal periods presented are included in the computation of diluted earnings per common share if their effect was dilutive.
10. OTHER ACCRUED EXPENSES
Other accrued expenses are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Sales and marketing
|
$
|
62,384
|
|
|
$
|
58,034
|
|
|
Accrued warranty obligation and deferred warranty revenue
|
26,427
|
|
|
34,112
|
|
|
Other accrued expenses
|
144,876
|
|
|
172,992
|
|
|
Total other accrued expenses
|
$
|
233,687
|
|
|
$
|
265,138
|
|
11. WARRANTY
The following table represents the rollforward of our accrued warranty obligation and deferred warranty revenue activity for the fiscal year ended December 31, 2019 and the transition period ended December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Beginning balance
|
$
|
134,515
|
|
|
$
|
30,659
|
|
|
Acquisition - Ply Gem
|
—
|
|
|
103,842
|
|
|
Purchase accounting adjustments
|
83,410
|
|
|
—
|
|
|
Warranties sold
|
2,910
|
|
|
3,194
|
|
|
Revenue recognized
|
(2,774)
|
|
|
(442)
|
|
|
Expense
|
28,580
|
|
|
—
|
|
|
Settlements
|
(30,468)
|
|
|
—
|
|
|
Cost incurred and other
|
—
|
|
|
(2,738)
|
|
|
Ending balance
|
216,173
|
|
|
134,515
|
|
|
Less: Current portion
|
26,427
|
|
|
34,112
|
|
|
Total, less current portion
|
$
|
189,746
|
|
|
$
|
100,403
|
|
The current portion of the warranty liabilities are recorded within other accrued expenses and the long-term portion of the warranty liabilities are recorded within other long-term liabilities in the Company’s consolidated balance sheets.
12. LONG-TERM DEBT
Debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Asset-based revolving credit facility due April 2023
|
$
|
70,000
|
|
|
$
|
—
|
|
|
Term loan facility due April 2025
|
2,523,587
|
|
|
2,549,207
|
|
|
Cash flow revolver due April 2023
|
—
|
|
|
—
|
|
|
8.00% senior notes due April 2026
|
645,000
|
|
|
645,000
|
|
|
Less: unamortized discounts and unamortized deferred financing costs(1)
|
(56,063)
|
|
|
(83,444)
|
|
|
Total long-term debt, net of unamortized discounts and deferred financing costs
|
3,182,524
|
|
|
3,110,763
|
|
|
Less: current portion of long-term debt
|
25,600
|
|
|
25,600
|
|
|
Total long-term debt, less current portion
|
$
|
3,156,924
|
|
|
$
|
3,085,163
|
|
(1)Includes the unamortized deferred financing costs associated with the term loan credit facility and the senior notes. The unamortized deferred financing costs associated with the asset-based revolving credit facility of $2.4 million and $3.1 million as of December 31, 2019 and 2018, respectively, are classified in other assets on the consolidated balance sheets.
The scheduled maturity of our debt is as follows (in thousands):
|
|
|
|
|
|
|
|
2020
|
$
|
25,600
|
|
|
2021
|
25,600
|
|
|
2022
|
25,600
|
|
|
2023
|
95,600
|
|
|
2024 and thereafter
|
3,066,187
|
|
|
|
$
|
3,238,587
|
|
Merger Debt Transactions
In connection with the Merger, on November 16, 2018, the Company assumed (i) the obligations of Ply Gem Midco, a subsidiary of Ply Gem immediately prior to the consummation of the Merger, as borrower under the Current Cash Flow Credit Agreement, (ii) the obligations of Ply Gem Midco as parent borrower under the Current ABL Credit Agreement and (iii) the obligations of Ply Gem Midco as issuer under the Current Indenture.
February 2018 Debt Redemption and Refinancing
On February 8, 2018, the Company entered into the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement, the proceeds of which, together, were used to redeem the then existing 8.25% senior notes due 2023 (the "8.25% Senior Notes") and to refinance the Company’s then existing term loan credit facility and the Company’s then existing asset-based revolving credit facility.
Term Loan Credit Agreement due February 2025
On February 8, 2018, the Company entered into the Pre-merger Term Loan Credit Agreement which provided for a term loan credit facility in an original aggregate principal amount of $415.0 million (the “Pre-merger Term Loan Credit Facility”). Proceeds from borrowings under the Pre-merger Term Loan Credit Facility were used, together with cash on hand, (i) to refinance the then existing term loan credit agreement, (ii) to redeem and repay the 8.25% Senior Notes and (iii) to pay any fees, premiums and expenses incurred in connection with the refinancing. On November 16, 2018, the Company repaid the remaining $412.9 million aggregate principal amount of the term loans outstanding under the Pre-merger Term Loan Credit Facility for approximately $413.7 million, reflecting remaining principal and interest, using proceeds from the incremental term loan facility entered into in connection with the Merger.
Term Loan Facility due April 2025 and Cash Flow Revolver due April 2023
On April 12, 2018, Ply Gem Midco entered into the Current Cash Flow Credit Agreement, which provides for (i) a term loan facility (the “Current Term Loan Facility”) in an original aggregate principal amount of $1,755.0 million, issued with a discount of 0.5%, and (ii) a cash flow-based revolving credit facility (the “Current Cash Flow Revolver” and together with the Term Loan Facility, the “Current Cash Flow Facilities”) of up to $115.0 million. The Current Term Loan Facility amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon final maturity of the Current Term Loan Facility on April 12, 2025. There are no amortization payments under the Current Cash Flow Revolver, and all borrowings under the Current Cash Flow Revolver mature on April 12, 2023.
On November 16, 2018, the Company entered into an incremental term loan facility in connection with the Merger, which increased the aggregate principal amount of the Current Term Loan Facility by $805.0 million. The proceeds of this incremental term loan facility were used to, among other things, (a) finance the Merger and to pay certain fees, premiums and expenses incurred in connection therewith, (b) repay in full amounts outstanding under the Pre-merger Term Loan Credit Agreement and the Pre-merger ABL Credit Agreement and (c) repay $325.0 million of borrowings outstanding under the ABL Facility. On November 16, 2018, in connection with the consummation of the Merger, NCI and Ply Gem Midco entered into a joinder agreement with respect to the Current Cash Flow Facilities, and the Company became the Borrower (as defined in the Current Cash Flow Credit Agreement) under the Current Cash Flow Facilities.
The Current Term Loan Facility bears annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a floor of 0.00%) plus an applicable margin of 3.75% per annum or (ii) an alternate base rate plus an applicable margin of 2.75% per annum. At December 31, 2019, the interest rates on the Current Term Loan Facility were as follows:
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Interest rate
|
5.49
|
%
|
|
Effective interest rate
|
6.51
|
%
|
The Company entered into certain interest rate swap agreements during fiscal 2019 to convert a portion of its variable rate debt to fixed. See Note 15 — Fair Value of Financial Instruments and Fair Value Measurements.
Loans outstanding under the Current Cash Flow Revolver bear annual interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (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. Additionally, unused commitments under the Current 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.
The Current Term Loan Facility may be prepaid at the Company’s option at any time, subject to minimum principal amount requirements. Prepayments of the Current Term Loan Facility in connection with a repricing transaction (as defined in the Current Cash Flow Credit Agreement) on or prior to April 12, 2019 are subject to a 1.00% prepayment premium. Prepayments may otherwise be made without premium or penalty (other than customary breakage costs). The Current 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.
Subject to certain exceptions, the Current Term Loan Facility is subject to mandatory prepayments in an amount equal to:
•the net cash proceeds of (1) certain asset sales, (2) certain debt offerings and (3) 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. The annual excess cash flow assessment began with the Company’s 2019 fiscal year, payable within five business days after the delivery of the annual financial statements. For fiscal 2019, no payments were required under the excess cash flow calculation.
The obligations under the Current Cash Flow Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in substantially all tangible and intangible assets of the Company and each subsidiary guarantor (other than ABL Priority Collateral (as defined below)), including the capital stock of each direct material wholly-owned U.S. restricted subsidiary owned by the Company and each subsidiary guarantor, and 65% of the capital stock of any non-U.S. subsidiary held directly by the Company or any subsidiary guarantor, subject to certain exceptions (the “Cash Flow Priority Collateral”), which security interest will be senior to the security interest in the foregoing assets securing the Current ABL Facility; and
•a perfected security interest in the ABL Priority Collateral, which security interest will be junior to the security interest in the ABL Priority Collateral securing the Current ABL Facility.
The Current Cash Flow Revolver 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.
ABL Credit Agreement due February 2023
On February 8, 2018, the subsidiaries of the Company, NCI Group, Inc. and Robertson-Ceco II Corporation, and the Company as a guarantor, entered into the Pre-merger ABL Credit Agreement. The Pre-merger ABL Credit Agreement provided for an asset-based revolving credit facility (the “Pre-merger ABL Credit Facility”) which allowed aggregate maximum borrowings by the ABL borrowers of up to $150.0 million, letters of credit of up to $30.0 million and up to $20.0 million for swingline borrowings. Borrowing availability was determined by a monthly borrowing base collateral calculation that was based on specified percentages of the value of accounts receivable, eligible credit card receivables and eligible inventory, less certain reserves and subject to certain other adjustments. Availability was reduced by issuance of letters of credit as well as any borrowings. All borrowings under the Pre-merger ABL Credit Facility would have matured on February 8, 2023. This facility was terminated in connection with the Merger and replaced with the Current ABL Facility (defined below).
ABL Facility due April 2023
On April 12, 2018, Ply Gem Midco entered into the Current ABL Credit Agreement, which provides for an asset-based revolving credit facility (the “Current ABL Facility”) of up to $360.0 million, consisting of (i) $285.0 million available to U.S. borrowers (subject to U.S. borrowing base availability) (the “ABL U.S. Facility”) and (ii) $75.0 million available to both U.S. borrowers and Canadian borrowers (subject to U.S. borrowing base and Canadian borrowing base availability) (the “ABL Canadian Facility”). The Company and, at their option, certain of their subsidiaries are the borrowers under the Current ABL Facility. All borrowings under the Current ABL Facility mature on April 12, 2023.
On October 15, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $36.0 million, which upsized the Current ABL Facility to $396.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $285.0 million to $313.5 million and (y) the ABL Canadian Facility being increased from $75.0 million to $82.5 million.
On November 16, 2018, Ply Gem Midco entered into an incremental asset-based revolving credit facility of $215.0 million in connection with the Merger, which upsized the Current ABL Facility to $611.0 million in the aggregate, and with (x) the ABL U.S. Facility being increased from $313.5 million to approximately $483.7 million and (y) the ABL Canadian Facility being increased from $82.5 million to approximately $127.3 million. On November 16, 2018, in connection with the consummation of the Merger, the Company and Ply Gem Midco entered into a joinder agreement with respect to the Current ABL Facility, and the Company became the Parent Borrower (as defined in the ABL Credit Agreement) under the Current ABL Facility.
Borrowing availability under the Current ABL Facility is determined by a monthly borrowing base collateral calculation that is based on specified percentages of the value of eligible inventory, eligible accounts receivable and eligible credit card receivables, less certain reserves and subject to certain other adjustments as set forth in the Current ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings. As of December 31, 2019, the Company had the following in relation to the Current ABL Facility (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Excess availability
|
$
|
425,920
|
|
|
Revolving loans outstanding
|
70,000
|
|
|
Letters of credit outstanding
|
30,223
|
|
Loans outstanding under the Current ABL Facility bear interest at a floating rate measured by reference to, at the Company’s option, either (i) an adjusted LIBOR rate (subject to a LIBOR 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 Current 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. At December 31, 2019, the weighted average interest rate on the Current ABL Facility was 3.24%.
The obligations under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned U.S. restricted subsidiary of the Company, subject to certain exceptions, and are secured by:
•a perfected security interest in all present and after-acquired inventory, accounts receivable, deposit accounts, securities accounts, and any cash or other assets in such accounts and other related assets owned by the Company and the U.S. subsidiary guarantors and the proceeds of any of the foregoing, except to the extent such proceeds constitute Cash Flow Priority Collateral, and subject to certain exceptions (the “ABL Priority Collateral”), which security interest is senior to the security interest in the foregoing assets securing the Current Cash Flow Facilities; and
•a perfected security interest in the Cash Flow Priority Collateral, which security interest will be junior to the security interest in the Cash Flow Collateral securing the Current Cash Flow Facilities.
Additionally, the obligations of the Canadian borrowers under the Current ABL Credit Agreement are guaranteed by each direct and indirect wholly-owned Canadian restricted subsidiary of the Canadian borrowers, subject to certain exceptions, and are secured by substantially all assets of the Canadian borrowers and the Canadian subsidiary guarantors, subject to certain exceptions.
The Current 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 Current 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.
8.00% Senior Notes due April 2026
On April 12, 2018, Ply Gem Midco issued $645.0 million at a discount of 2.25% in aggregate principal amount of 8.00% Senior Notes due April 2026 (the “8.00% Senior Notes”). The 8.00% Senior Notes bear interest at 8.00% per annum and will mature on April 15, 2026. Interest is payable semi-annually in arrears on April 15 and October 15. The effective interest rate for the 8.00% Senior Notes was 8.64% as of December 31, 2019, after considering each of the different interest expense components of this instrument, including the coupon payment and the deferred debt issuance costs.
On November 16, 2018, in connection with the consummation of the Merger, the Company entered into a supplemental indenture and assumed the obligations of Ply Gem Midco as issuer under the Current Indenture.
The 8.00% Senior Notes are guaranteed on a senior unsecured basis by each of the Company’s wholly-owned domestic subsidiaries that guarantee the Company’s obligations under the Current Cash Flow Facilities or the Current ABL Facility (including by reason of being a borrower under the Current ABL Facility on a joint and several basis with the Company or a subsidiary guarantor). The 8.00% Senior Notes are unsecured senior indebtedness and rank equally in right of payment with the Current Cash Flow Facilities and Current ABL Facility. The 8.00% Senior Notes are effectively subordinated to all of the Company’s secured debt, including the Current Cash Flow Facilities and Current ABL Facility, and are senior in right of payment to all subordinated obligations of the Company.
The Company may redeem the 8.00% Senior Notes in whole or in part at any time as set forth below:
•prior to April 15, 2021, the Company may redeem the 8.00% Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to but not including the redemption date, plus the applicable make-whole premium;
•prior to April 15, 2021, the Company may redeem up to 40.0% of the original aggregate principal amount of the 8.00% Senior Notes with proceeds of certain equity offerings, at a redemption price of 108%, plus accrued and unpaid interest, if any, to but not including the redemption date; and
•on or after April 15, 2021, the Company may redeem the 8.00% Senior Notes at specified redemption prices starting at 104% and declining ratably to 100.0% by April 15, 2023, plus accrued and unpaid interest, if any, to but not including the redemption date.
Redemption of 8.25% Senior Notes
On January 16, 2015, the Company issued $250.0 million in aggregate principal of 8.25% senior notes. On February 8, 2018, the Company redeemed the outstanding $250.0 million aggregate principal amount of the 8.25% Notes for approximately $265.5 million using the proceeds from borrowings under the Pre-merger Term Loan Credit Facility.
During the fiscal year ended October 28, 2018, the Company incurred a pretax loss, primarily on the extinguishment of the Notes, of $21.9 million, of which approximately $15.5 million represents the premium paid on the redemption of the Notes.
Transition Period Loss on Extinguishment of Debt
As a result of the Merger, during the transition period ended December 31, 2018, the Company incurred a $3.3 million pretax loss on the extinguishment of the Pre-merger Term Loan Credit Facility and the Pre-merger ABL Credit Agreement, of which approximately $2.4 million represented unamortized debt issuance costs on the Pre-merger Term Loan Credit Facility.
Debt Covenants
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. As of December 31, 2019, the Company was in compliance with all covenants that were in effect on such date.
13. CD&R INVESTOR GROUP
On August 14, 2009, the Company entered into an Investment Agreement (as amended, the “Investment Agreement”), by and between the Company and Clayton, Dubilier & Rice Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R Fund VIII”). In connection with the Investment Agreement and the Stockholders Agreement dated October 20, 2009 (the “Old Stockholders Agreement”), CD&R Fund VIII and CD&R Friends & Family Fund VIII, L.P., a Cayman Islands exempted limited partnership (“CD&R FF Fund” and, together with CD&R Fund VIII, the “CD&R Fund VIII Investor Group”) purchased convertible preferred stock of the Company, which was converted into shares of our common stock on May 14, 2013.
In January 2014, the CD&R Fund VIII Investor Group completed a registered underwritten offering, in which the CD&R Fund VIII Investor Group offered 8.5 million shares of Common Stock at a price to the public of $18.00 per share (the “2014 Secondary Offering”). The underwriters also exercised their option to purchase 1.275 million additional shares of Common Stock. In addition, the Company entered into an agreement with the CD&R Fund VIII Investor Group to repurchase 1.15 million shares of its Common Stock at a price per share equal to the price per share paid by the underwriters to the CD&R Fund VIII Investor Group in the underwritten offering (the “2014 Stock Repurchase”). The 2014 Stock Repurchase, which was completed at the same time as the 2014 Secondary Offering, represented a private, non-underwritten transaction between NCI and the CD&R Fund VIII Investor Group that was approved and recommended by the Affiliate Transactions Committee of our Board of Directors.
On July 25, 2016, the CD&R Fund VIII Investor Group completed a registered underwritten offering, in which the CD&R Fund VIII Investor Group offered 9.0 million shares of our Common Stock at a price to the public of $16.15 per share (the “2016 Secondary Offering”). The underwriters also exercised their option to purchase 1.35 million additional shares of our Common Stock from the CD&R Fund VIII Investor Group. The aggregate offering price for the 10.35 million shares sold in the 2016 Secondary Offering was approximately $160.1 million, net of underwriting discounts and commissions. The CD&R Fund VIII Investor Group received all of the proceeds from the 2016 Secondary Offering and no shares in the 2016 Secondary Offering were sold by the Company or any of its officers or directors (although certain of our directors are affiliated with the CD&R Fund VIII Investor Group).
On July 18, 2016, the Company entered into an agreement with the CD&R Fund VIII Investor Group to repurchase approximately 2.9 million shares of our Common Stock at the price per share equal to the price per share paid by the underwriters to the CD&R Fund VIII Investor Group in the underwritten offering (the “2016 Stock Repurchase”). The 2016 Stock Repurchase, which was completed concurrently with the 2016 Secondary Offering, represented a private, non-underwritten transaction between the Company and the CD&R Fund VIII Investor Group that was approved and recommended by the Affiliate Transactions Committee of our Board of Directors. See Note 18 — Stock Repurchase Program.
On December 11, 2017, the CD&R Fund VIII Investor Group completed a registered underwritten offering of 7,150,000 shares of the Company’s Common Stock at a price to the public of $19.36 per share (the “2017 Secondary Offering”). Pursuant to the underwriting agreement, at the CD&R Fund VIII Investor Group request, the Company purchased 1.15 million of the 7.15 million shares of the Company's Common Stock from the underwriters in the 2017 Secondary Offering at a price per share equal to the price at which the underwriters purchased the shares from the CD&R Fund VIII Investor Group. The total amount the Company spent on these repurchases was $22.3 million.
Ply Gem Holdings was acquired by CD&R Fund X and Atrium Intermediate Holdings, LLC, GGC BP Holdings, LLC and AIC Finance Partnership, L.P. (collectively, the “Golden Gate Investor Group”) and merged with Atrium on April 12, 2018 (the “Ply Gem-Atrium Merger”).
Pursuant to the terms of the Merger Agreement, on November 16, 2018, the Company entered into (i) a stockholders agreement (the “New Stockholders Agreement”) between the Company, and each of the CD&R Fund VIII Investor Group, CD&R Pisces Holdings, L.P., a Cayman Islands exempted limited partnership (“CD&R Pisces”, and together with the CD&R Fund VIII Investor Group, the “CD&R Investor Group”) and the Golden Gate Investor Group (together with the CD&R Investor Group, the “Investors”), pursuant to which the Company granted to the Investors certain governance, preemptive and subscription rights and (ii) a registration rights agreement (the “New Registration Rights Agreement”) between the Company and each of the Investors, pursuant to which the Company granted the Investors customary demand and piggyback registration rights, including rights to demand registrations and underwritten shelf registration statement offerings with respect to the shares of the Company’s Common Stock that are held by the Investors following the consummation of the Merger.
Pursuant to the terms of the New Stockholders Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Old Stockholders Agreement. Pursuant to the terms of the New Registration Rights Agreement, the Company and the CD&R Fund VIII Investor Group terminated the Registration Rights Agreement, dated as of October 20, 2009 (the “Old Registration Rights Agreement”), by and among the Company and the CD&R Fund VIII Investor Group.
At December 31, 2019 and 2018, the CD&R Investor Group owned approximately 49.1% and 49.4%, respectively, of the outstanding shares of the Company's Common Stock.
14. RELATED PARTIES
Pursuant to the Investment Agreement and the New Stockholders Agreement, the CD&R Investor Group had the right to designate a number of directors to the Company’s Board of Directors that was equivalent to the CD&R VIII Investor Group’s percentage interest in the Company. Among other directors appointed by the CD&R Investor Group, our Board of Directors appointed to the Board of Directors John Krenicki, Nathan K. Sleeper and Jonathan L. Zrebiec. Messrs. Krenicki, Sleeper and Zrebiec are partners of Clayton, Dubilier & Rice, LLC, (“CD&R, LLC”), an affiliate of the CD&R Investor Group.
As a result of their respective positions with CD&R, LLC and its affiliates, one or more of Messrs. Krenicki, Sleeper and Zrebiec may be deemed to have an indirect material interest in certain agreements executed in connection with the Equity Investment and the Merger.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable and accounts payable approximate fair value as of December 31, 2019 and 2018 because of the relatively short maturity of these instruments. The carrying amounts of the indebtedness under the Current ABL Facility and Current Cash Flow Revolver approximate fair value as the interest rates are variable and reflective of market rates. At December 31, 2019, there was $70.0 million of borrowings outstanding under the Current ABL Facility and no outstanding indebtedness under the Current Cash Flow Revolver. The fair values of the remaining financial instruments not currently recognized at fair value on our consolidated balance sheets at the respective period ends were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Term loan facility due April 2025
|
$
|
2,523,587
|
|
|
$
|
2,514,906
|
|
|
$
|
2,549,207
|
|
|
$
|
2,319,778
|
|
|
8.00% Senior Notes
|
645,000
|
|
|
670,800
|
|
|
645,000
|
|
|
599,850
|
|
The fair values of the term loan facility were based on recent trading activities of comparable market instruments, which are level 2 inputs and the fair value of the 8.00% senior notes was based on quoted prices in active markets for the identical liabilities, which are level 1 inputs.
Fair Value Measurements
ASC Subtopic 820-10, Fair Value Measurements and Disclosures, 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.
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at December 31, 2019 and 2018.
Money market: Money market funds have original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity.
Mutual funds: Mutual funds are valued at the closing price reported in the active market in which the mutual fund is traded.
Assets held for sale: Assets held for sale are valued based on current market conditions, prices of similar assets in similar condition and expected proceeds from the sale of the assets.
Deferred compensation plan liability: Deferred compensation plan liability is comprised of phantom investments in the deferred compensation plan and is valued at the closing price reported in the active markets in which the money market and mutual funds are traded.
Interest rate swap liability: Interest rate swap liabilities 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 were classified within Level 2 of the fair value hierarchy because they were valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
Foreign currency hedge: The fair value of the foreign currency forward contract agreement is estimated using industry standard valuation models using market-based observable inputs, including spot rates, forward points, interest rates and volatility inputs (Level 2).
The following tables summarize information regarding our financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018, segregated by level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan:(1)
|
|
|
|
|
|
|
|
|
Money market
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
Mutual funds – Growth
|
1,044
|
|
|
—
|
|
|
—
|
|
|
1,044
|
|
|
Mutual funds – Blend
|
1,769
|
|
|
—
|
|
|
—
|
|
|
1,769
|
|
|
Mutual funds – Foreign blend
|
572
|
|
|
—
|
|
|
—
|
|
|
572
|
|
|
Mutual funds – Fixed income
|
—
|
|
|
389
|
|
|
—
|
|
|
389
|
|
|
Total short-term investments in deferred compensation plan(2)
|
3,387
|
|
|
389
|
|
|
—
|
|
|
3,776
|
|
|
Foreign currency hedge(4)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total assets
|
$
|
3,387
|
|
|
$
|
389
|
|
|
$
|
—
|
|
|
$
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability(2)
|
$
|
—
|
|
|
$
|
3,847
|
|
|
$
|
—
|
|
|
$
|
3,847
|
|
|
Interest rate swap liability(3)
|
—
|
|
|
29,988
|
|
|
—
|
|
|
29,988
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
33,835
|
|
|
$
|
—
|
|
|
$
|
33,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Short-term investments in deferred compensation plan:(1)
|
|
|
|
|
|
|
|
|
Money market
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
Mutual funds – Growth
|
960
|
|
|
—
|
|
|
—
|
|
|
960
|
|
|
Mutual funds – Blend
|
1,537
|
|
|
—
|
|
|
—
|
|
|
1,537
|
|
|
Mutual funds – Foreign blend
|
717
|
|
|
—
|
|
|
—
|
|
|
717
|
|
|
Mutual funds – Fixed income
|
—
|
|
|
553
|
|
|
—
|
|
|
553
|
|
|
Total short-term investments in deferred compensation plan(2)
|
3,218
|
|
|
553
|
|
|
—
|
|
|
3,771
|
|
|
Total assets
|
$
|
3,218
|
|
|
$
|
553
|
|
|
$
|
—
|
|
|
$
|
3,771
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation plan liability(2)
|
$
|
—
|
|
|
$
|
3,139
|
|
|
$
|
—
|
|
|
$
|
3,139
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
3,139
|
|
|
$
|
—
|
|
|
$
|
3,139
|
|
(1)The unrealized holding gain (loss) was $0.5 million and $(0.8) million for the year ended December 31, 2019 and the transition period ended December 31, 2018, respectively.
(2)The Company records the short-term investments in deferred compensation plan within investments in debt and equity securities, at market, and the deferred compensation plan liability within accrued compensation and benefits on the consolidated balance sheets.
(3)In May 2019, the Company entered into 4 year interest rate swaps to mitigate variability in forecasted interest payments on $1,500.0 million of the Company’s Term Loan secured variable debt. The interest rate swaps effectively convert a portion of the floating rate interest payments into a fixed rate interest payment. There are three interest rate swaps that cover $500.0 million of notional debt each and fix the interest rate at 5.918%, 5.906% and 5.907%, respectively. The Company designated the interest rate swaps as qualifying hedging instruments and accounts for these derivatives as cash flow hedges. The interest rate swap liability is included within other long-term liabilities on the consolidated balance sheets.
(4)In July 2019, the Company entered into a forward contract agreement to hedge approximately $21.9 million of its 2019 non-functional currency inventory purchases. This forward contract was established to protect the Company from variability in cash flows attributable to changes in the U.S. dollar relative to the Canadian dollar. As a cash flow hedge, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The forward contract is highly correlated to the changes in the U.S. dollar relative to the Canadian dollar. Unrealized gains and losses on these agreements are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses is recorded as a component of cost of goods sold. Future realized gains and losses in connection with each inventory purchase will be reclassified from accumulated other comprehensive income or loss to cost of goods sold. The gains and losses on the derivative contract that are reclassified from accumulated other comprehensive income or loss to current period earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. During fiscal 2019, the Company realized a gain of approximately $0.1 million within cost of goods sold in the consolidated statement of operations based on these cash flow hedges. The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in accumulated other comprehensive income or loss and are reclassified into cost of goods sold in the same period the hedged item affects earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. The changes in the fair value of derivatives that do not qualify as effective are immediately recognized in earnings. As of December 31, 2019, the forward contracts during fiscal 2019 have been settled.
16. INCOME TAXES
Income tax expense is based on pretax financial accounting income. Deferred income taxes are recognized for the temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and such amounts for income tax purposes.
The following is a summary of the components of income (loss) before provision (benefit) for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29, 2018 - December 31, 2018
|
|
Domestic
|
$
|
(12,016)
|
|
|
|
$
|
74,465
|
|
|
|
$
|
78,884
|
|
|
|
$
|
(90,306)
|
|
|
Foreign
|
1,401
|
|
|
|
8,630
|
|
|
|
4,254
|
|
|
|
(6,551)
|
|
|
|
$
|
(10,615)
|
|
|
|
$
|
83,095
|
|
|
|
$
|
83,138
|
|
|
|
$
|
(96,857)
|
|
The components of the provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29, 2018 - December 31, 2018
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
(311)
|
|
|
$
|
16,850
|
|
|
$
|
23,885
|
|
|
$
|
—
|
|
|
State
|
7,219
|
|
|
3,483
|
|
|
3,218
|
|
|
1,172
|
|
|
Foreign
|
3,952
|
|
|
545
|
|
|
445
|
|
|
(120)
|
|
|
Total current
|
10,860
|
|
|
20,878
|
|
|
27,548
|
|
|
1,052
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
205
|
|
|
(2,937)
|
|
|
(358)
|
|
|
(17,041)
|
|
|
State
|
1,875
|
|
|
565
|
|
|
769
|
|
|
(3,759)
|
|
|
Foreign
|
(8,165)
|
|
|
1,483
|
|
|
455
|
|
|
(919)
|
|
|
Total deferred
|
(6,085)
|
|
|
(889)
|
|
|
866
|
|
|
(21,719)
|
|
|
Total provision (benefit)
|
$
|
4,775
|
|
|
$
|
19,989
|
|
|
$
|
28,414
|
|
|
$
|
(20,667)
|
|
The reconciliation of income tax computed at the United States federal statutory tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29, 2018 - December 31, 2018
|
|
Statutory federal income tax rate
|
$
|
(2,229)
|
|
|
$
|
19,361
|
|
|
$
|
29,098
|
|
|
$
|
(20,022)
|
|
|
State income taxes
|
8,059
|
|
|
3,490
|
|
|
2,660
|
|
|
(2,945)
|
|
|
Production activities deduction
|
—
|
|
|
(1,413)
|
|
|
(2,577)
|
|
|
—
|
|
|
Non-deductible expenses
|
62
|
|
|
166
|
|
|
748
|
|
|
2
|
|
|
Revaluation of U.S. deferred income tax due to statutory rate reduction
|
—
|
|
|
(997)
|
|
|
—
|
|
|
—
|
|
|
One-time repatriation tax on foreign earnings
|
—
|
|
|
499
|
|
|
—
|
|
|
—
|
|
|
Compensation related expenses
|
3,518
|
|
|
|
69
|
|
|
|
(1,360)
|
|
|
|
74
|
|
|
Meals and entertainment
|
1,265
|
|
|
|
288
|
|
|
|
503
|
|
|
|
164
|
|
|
Tax credits
|
(7,179)
|
|
|
|
(850)
|
|
|
|
(1,105)
|
|
|
|
(360)
|
|
|
Foreign income tax
|
(884)
|
|
|
|
365
|
|
|
|
900
|
|
|
|
256
|
|
|
Employee fringe benefits
|
474
|
|
|
|
101
|
|
|
|
23
|
|
|
|
—
|
|
|
Unrecognized tax benefits
|
(581)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
143
|
|
|
Reversal of valuation allowance
|
(3,981)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Global intangible low-taxed income
|
4,398
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
Transaction costs
|
1,903
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,542
|
|
|
Other(1)
|
(50)
|
|
|
(1,090)
|
|
|
(476)
|
|
|
389
|
|
|
Total provision (benefit)
|
$
|
4,775
|
|
|
$
|
19,989
|
|
|
$
|
28,414
|
|
|
$
|
(20,667)
|
|
|
|
|
|
|
|
|
|
|
|
(1) Certain reclassifications of items included in “Other” in fiscal 2018 and 2017 have been made to conform to fiscal 2019 classifications.
|
|
|
|
|
|
|
|
The decrease in the effective tax rate for the fiscal year ended December 31, 2019 is a result of lower pretax earnings related to $68.2 million of integration costs, the reversal of a valuation allowance from a foreign subsidiary, and the net impact of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) which was enacted by the United States on December 22, 2017. U.S. Tax Reform incorporates significant changes to U.S. corporate income tax laws including, among other things, a reduction in the federal statutory corporate income tax rate from 35% to 21%, an exemption for dividends received from certain foreign subsidiaries, a one-time repatriation tax on deemed repatriated earnings from foreign subsidiaries, immediate expensing of certain depreciable tangible assets, limitations on the deduction for net interest expense and certain executive compensation and the repeal of the Domestic Production Activities Deduction. The majority of these changes were effective for the Company’s fiscal year beginning October 29, 2018. However, the corporate income tax rate reduction was effective December 22, 2017. As such, the Company’s statutory federal corporate income tax rate for the fiscal year ended October 28, 2018 was 23.3%. In addition, the one-time repatriation tax was recognized by the Company for the tax year ended October 28, 2018.
Deferred income taxes reflect the net impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The tax effects of the temporary differences as December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Deferred tax assets:
|
|
|
|
|
Inventory obsolescence
|
$
|
3,980
|
|
|
$
|
3,830
|
|
|
Bad debt reserve
|
1,942
|
|
|
1,520
|
|
|
Accrued and deferred compensation
|
9,172
|
|
|
9,613
|
|
|
Accrued insurance reserves
|
3,878
|
|
|
2,339
|
|
|
|
|
|
|
|
Net operating loss and tax credit carryover
|
60,987
|
|
|
70,017
|
|
|
|
|
|
|
|
Pension
|
6,015
|
|
|
6,401
|
|
|
Interest
|
60,257
|
|
|
36,406
|
|
|
Leases
|
80,372
|
|
|
—
|
|
|
Warranty
|
39,469
|
|
|
28,313
|
|
|
Other reserves
|
28,707
|
|
|
30,637
|
|
|
Total deferred tax assets
|
294,779
|
|
|
189,076
|
|
|
Less valuation allowance
|
(10,347)
|
|
|
(19,497)
|
|
|
Net deferred tax assets
|
284,432
|
|
|
169,579
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
(474,214)
|
|
|
(463,198)
|
|
|
Stock basis
|
(10,568)
|
|
|
—
|
|
|
Leases
|
(80,376)
|
|
|
—
|
|
|
|
|
|
|
|
Other
|
(3,751)
|
|
|
(858)
|
|
|
Total deferred tax liabilities
|
(568,909)
|
|
|
(464,056)
|
|
|
Total deferred tax liability, net
|
$
|
(284,477)
|
|
|
$
|
(294,477)
|
|
We carry out our business operations through legal entities in the U.S., Canada, Mexico and Costa Rica, and carried out operations in China until the sale of our manufacturing facility in China during fiscal 2018. These operations require that we file corporate income tax returns that are subject to U.S., state and foreign tax laws. We are subject to income tax audits in these multiple jurisdictions.
As of December 31, 2019, the $60.9 million net operating loss carryforward included $32.6 million for U.S federal losses, $11.6 million for U.S. state losses, and $16.7 million for foreign losses. The state net operating loss carryforwards will begin to expire in 2020, if unused, and the foreign loss carryforward will begin to expire in fiscal 2028, if unused.
Valuation allowance
As of December 31, 2019, the Company remains in a valuation allowance position, in the amount of $10.3 million, against its deferred tax assets for certain state jurisdictions as it is currently deemed “more likely than not” that the benefit of such net tax assets will not be utilized as the Company continues to be in a three-year cumulative loss position for these states jurisdictions. The Company will continue to monitor the positive and negative factors for these jurisdictions and make further changes to the valuation allowance as necessary.
During the quarter and year ending December 31, 2019, the Company reversed the valuation allowance for Gienow Canada, Inc. ("Gienow") due to its amalgamation with Northstar Manufacturing, Ltd ("Northstar") at December 31, 2019. The Company determined that a valuation allowance was no longer required due to Northstar’s three-year cumulative income position.
The rollforward of the valuation allowance on deferred taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
December 31,
2019
|
|
October 29, 2018 - December 31, 2018
|
|
October 28,
2018
|
|
October 29,
2017
|
|
Beginning balance
|
$
|
19,497
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
210
|
|
|
Additions (reductions)
|
(9,150)
|
|
|
—
|
|
|
11
|
|
|
(210)
|
|
|
Allowance of acquired company at date of acquisition
|
—
|
|
|
19,486
|
|
|
|
—
|
|
|
—
|
|
|
Ending balance
|
$
|
10,347
|
|
|
$
|
19,497
|
|
|
$
|
11
|
|
|
$
|
—
|
|
Uncertain tax positions
Despite the Company’s belief that its tax return positions are consistent with applicable tax laws, the Company believes that certain positions could be challenged by taxing authorities. The Company’s tax reserves reflect the difference between the tax benefit claimed on tax returns and the amount recognized in the consolidated financial statements. These reserves have been established based on management’s assessment as to potential exposure attributable to permanent differences and interest and penalties applicable to both permanent and temporary differences. The tax reserves are reviewed periodically and adjusted in light of changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in tax law. The Company is currently under examination by various taxing authorities.
As of December 31, 2019 the reserve was approximately $11.9 million, which includes interest and penalties of approximately $1.8 million and is recorded in other long-term liabilities in the accompanying consolidated balance sheets. Of this amount, approximately $9.9 million, if recognized would have an impact on the Company's effective tax rate. The difference between the total unrecognized tax benefits and the amount of the liability for unrecognized tax benefits represents unrecognized tax benefits that have been netted against deferred tax assets related to net operating losses in accordance with ASC 740 in addition to accrued penalties and interest.
The Company has elected to treat interest and penalties on unrecognized tax benefits as income tax expense in its consolidated statement of operations. Interest and penalty charges have been recorded in the contingency reserve account within other long-term liabilities in the consolidated balance sheets.
The following is a rollforward of unrecognized tax benefits (excluding interest and penalties) from October 30, 2017 through December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
Fiscal Year Ended
|
|
|
December 31,
2019
|
|
October 29, 2018 - December 31, 2018
|
|
October 28,
2018
|
|
Unrecognized tax benefits at beginning of year
|
$
|
10,549
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Additions based on tax positions related to current year
|
262
|
|
|
—
|
|
|
—
|
|
|
Unrecognized tax benefits positions of acquired company at date of acquisition
|
—
|
|
|
10,549
|
|
|
—
|
|
|
Reductions for tax positions of prior years
|
(95)
|
|
|
—
|
|
|
—
|
|
|
Reductions resulting from expiration of statute of limitations
|
(609)
|
|
|
—
|
|
|
—
|
|
|
Unrecognized tax benefits at end of year
|
$
|
10,107
|
|
|
$
|
10,549
|
|
|
$
|
—
|
|
Tax receivable agreement (“TRA”) liability
The TRA liability generally provides for the payment by Ply Gem to a third party entity of 85% of the amount of cash savings, if any, in the U.S. federal, state and local income tax that Ply Gem actually realizes as a result of (i) net operating loss carryovers (“NOLs”) from periods ending before January 1, 2013, (ii) deductible expenses attributable to Ply Gem’s 2013 initial public offering and (iii) deductions related to imputed interest. This liability carried over to the Company in connection with the consummation of the Merger on November 16, 2018. Ply Gem’s future taxable income estimate was used to determine the cumulative NOLs that are expected to be utilized and the TRA liability was accordingly adjusted using the 85% TRA rate as Ply Gem retains the benefit of 15% of the tax savings. During the Transition Period, the Company made a $22.5 million payment pursuant to the Tax Receivable Agreement. During fiscal 2019, the Company made a $24.9 million payment pursuant to the Tax Receivable Agreement to settle this liability
Other tax considerations
As of December 31, 2019, the Company has not established U.S. deferred taxes on unremitted earnings for the Company's foreign subsidiaries. The Company continues to consider these amounts to be permanently invested. The indefinite reinvestment assertion continues to apply for the purpose of determining deferred tax liabilities for U.S. state and foreign withholding tax purposes.
17. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Foreign exchange translation adjustments
|
$
|
(1,090)
|
|
|
$
|
(4,301)
|
|
|
Unrealized loss on derivative instruments, net of tax benefit of $6,627 and $0, respectively
|
(23,361)
|
|
|
(549)
|
|
|
Defined benefit pension plan actuarial losses, net of tax benefit of $4,818 and $6,574, respectively
|
(7,947)
|
|
|
(5,963)
|
|
|
Accumulated other comprehensive loss
|
$
|
(32,398)
|
|
|
$
|
(10,813)
|
|
18. STOCK REPURCHASE PROGRAM
On September 8, 2016, the Company announced that its Board of Directors authorized a stock repurchase program for the repurchase of up to an aggregate of $50.0 million of the Company’s outstanding Common Stock. On October 10, 2017 and March 7, 2018, the Company announced that its Board of Directors authorized new stock repurchase programs for up to an aggregate of $50.0 million and $50.0 million, respectively, of the Company’s Common Stock for a cumulative three year total of $150.0 million.
During fiscal 2017 and fiscal 2018, the Company repurchased 2.8 million shares of its Common Stock for $41.2 million and 2.7 million shares of its Common Stock for $46.7 million, respectively, through open-market purchases under the authorized stock repurchase programs. The fiscal 2018 repurchases included 1.15 million shares for $22.3 million purchased pursuant to the CD&R Fund VIII Investor Group 2017 Secondary Offering (see Note 13 — CD&R Investor Group). During the Transition Period and fiscal 2019, there were no stock repurchases under the stock repurchase programs. As of December 31, 2019, approximately $55.6 million remains available for stock repurchases under the programs authorized on October 10, 2017 and March 7, 2018. The authorized programs have no time limit on their duration, but our Current Cash Flow Credit Agreement and Current ABL Credit Agreement apply certain limitations on our repurchase of shares of our Common Stock. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors, and may be suspended or discontinued at any time.
In addition to the Common Stock repurchases, the Company also withheld shares of restricted stock to satisfy minimum tax withholding obligations arising in connection with the vesting of restricted stock units, which are included in treasury stock purchases in the consolidated statements of stockholders’ equity.
During fiscal 2017, the Company canceled 3.0 million of the total shares repurchased during fiscal 2017 as well as 0.4 million shares repurchased in the prior fiscal year that had been held in treasury stock, resulting in a $50.6 million decrease in both additional paid-in capital and treasury stock. During fiscal 2018, the Company canceled 2.7 million shares repurchased under stock repurchase programs and canceled 0.3 million shares of stock that are included in treasury stock purchases and were used to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, resulting in a total $51.8 million decrease in both additional paid-in capital and treasury stock. During the Transition Period and fiscal 2019, the Company cancelled 0.3 million and 0.3 million shares of stock, respectively, that are included in treasury stock purchases and were used to satisfy minimum tax withholding obligations arising in connection with the vesting of stock awards, resulting in $3.6 million and $2.4 million decreases in both additional paid-in capital and treasury stock.
Changes in treasury stock, at cost, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Amount
|
|
Balance, October 30, 2016
|
775
|
|
|
$
|
9,259
|
|
|
Purchases
|
2,958
|
|
|
43,603
|
|
|
Issuance of restricted stock
|
20
|
|
|
—
|
|
|
Retirements
|
(3,444)
|
|
|
(50,587)
|
|
|
Deferred compensation obligation
|
(18)
|
|
|
(135)
|
|
|
Balance, October 29, 2017
|
291
|
|
|
$
|
2,140
|
|
|
Purchases
|
2,939
|
|
|
51,773
|
|
|
Issuance of restricted stock
|
(181)
|
|
|
—
|
|
|
Retirements
|
(2,939)
|
|
|
(51,772)
|
|
|
Deferred compensation obligation
|
(49)
|
|
|
(954)
|
|
|
Balance, October 28, 2018
|
61
|
|
|
$
|
1,187
|
|
|
Purchases
|
347
|
|
|
4,128
|
|
|
|
|
|
|
|
Retirements
|
(297)
|
|
|
(3,637)
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
111
|
|
|
$
|
1,678
|
|
|
Purchases
|
257
|
|
|
1,934
|
|
|
Retirements
|
(307)
|
|
|
(2,423)
|
|
|
Deferred compensation obligation
|
(6)
|
|
|
(86)
|
|
|
Balance, December 31, 2019
|
56
|
|
|
$
|
1,103
|
|
19. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan — The Company has several 401(k) profit sharing plans (the “Savings Plans”) that allow participation for all eligible employees. The Savings Plan for the legacy NCI employees allows the Company to match between 50% and 100% of the participant’s contributions up to 6% of a participant’s pre-tax deferrals, based on a calculation of the Company’s annual return-on-assets. The Savings Plan for the legacy Ply Gem and ESW employees allows the Company to match 50% of the first 6% of employee contributions with the option of making discretionary contributions into the Savings Plan for the legacy Ply Gem and ESW employees. Contributions expense for fiscal 2019, 2018 and 2017, and the transition period ended December 31, 2018 was $13.3 million, $7.6 million, $6.1 million and $2.4 million, respectively, for matching contributions to the Savings Plan.
Deferred Compensation Plan — The Company has an Amended and Restated Deferred Compensation Plan (as amended and restated, the “Deferred Compensation Plan”) that allows its officers and key employees to defer up to 80% of their annual salary and up to 90% of their bonus on a pre-tax basis until a specified date in the future, including at or after retirement. Additionally, the Deferred Compensation Plan allows the Company's directors to defer up to 100% of their annual fees and meeting attendance fees until a specified date in the future, including at or after retirement. The Deferred Compensation Plan also permits the Company to make contributions on behalf of its key employees who are impacted by the federal tax compensation limits under the Savings plan, and to receive a restoration matching amount which, under the current Savings Plan terms, mirrors the Savings Plan plan matching levels based on the Company’s performance. The Deferred Compensation Plan provides for the Company to make discretionary contributions to employees who have elected to defer compensation under the plan. Deferred Compensation Plan participants will vest in the Company's discretionary contributions ratably over three years from the date of each of the Company's discretionary contributions.
On February 26, 2016, the Company amended its Deferred Compensation Plan, with an effective date of January 31, 2016, to require that amounts deferred into the Company Stock Fund remain invested in the Company Stock Fund until distribution. In accordance with the terms of the Deferred Compensation Plan, the deferred compensation obligation related to the Company’s stock may only be settled by the delivery of a fixed number of the Company’s common shares held on the participant’s behalf. The deferred compensation obligation related to the Company Stock Fund recorded within equity in additional paid-in capital on the consolidated balance sheet was $0.6 million and $0.7 million as of December 31, 2019 and 2018, respectively. Subsequent changes in the fair value of the deferred compensation obligation classified within equity are not recognized. Additionally, the Company currently holds 55,101 shares in treasury shares, relating to deferred, vested awards, until participants are eligible to receive benefits under the terms of the Deferred Compensation Plan.
As of December 31, 2019 and 2018, the liability balance of the Deferred Compensation Plan was $3.8 million and $3.1 million, respectively, and was included in accrued compensation and benefits on the consolidated balance sheets. The Company has not made any discretionary contributions to the Deferred Compensation Plan.
A rabbi trust is used to fund the Deferred Compensation Plan and an administrative committee manages the Deferred Compensation Plan and its assets. The investments in the rabbi trust were $3.8 million and $3.4 million as of December 31, 2019 and 2018, respectively. The rabbi trust investments include debt and equity securities as well as cash equivalents and are accounted for as trading securities.
Defined Benefit Plans — With the acquisition of RCC on April 7, 2006, the Company assumed a defined benefit plan (the “RCC Pension Plan”). Benefits under the RCC Pension Plan are primarily based on years of service and the employee’s compensation. The RCC Pension Plan is frozen and, therefore, employees do not accrue additional service benefits. Plan assets of the RCC Pension Plan are invested in broadly diversified portfolios of government obligations, mutual funds, stocks, bonds, fixed income securities and master limited partnerships. In accordance with ASC Topic 805, we quantified the projected benefit obligation and fair value of the plan assets of the RCC Pension Plan and recorded the difference between these two amounts as an assumed liability.
As a result of the CENTRIA Acquisition on January 16, 2015, the Company assumed noncontributory defined benefit plans covering certain hourly employees (the “CENTRIA Benefit Plans”) which are closed to new participants. Benefits under the CENTRIA Benefit Plans are calculated based on fixed amounts for each year of service rendered. CENTRIA also sponsors postretirement medical and life insurance plans that cover certain of its employees and their spouses (the “OPEB Plans”). The contributions to the OPEB Plans by retirees vary from none to 25% of the total premiums paid. Plan assets of the CENTRIA Benefit Plans are invested in broadly diversified portfolios of equity mutual funds, international equity mutual funds, bonds, mortgages and other funds. Currently, the Company's policy is to fund the CENTRIA Benefit Plans as required by minimum funding standards of the Internal Revenue Code. In accordance with ASC Topic 805, the Company remeasured the projected benefit obligation and fair value of the plan assets of the CENTRIA Benefits Plans and OPEB Plans. The difference between the two amounts was recorded as an assumed liability.
In addition to the CENTRIA Benefit Plans, CENTRIA contributes to a multi-employer plan, the Steelworkers Pension Trust. The minimum required annual contribution to this plan is $0.3 million. The current contract expires on June 1, 2022. If we were to withdraw our participation from this multi-employer plan, CENTRIA may be required to pay a withdrawal liability representing an amount based on the underfunded status of the plan. The plan is not significant to the Company’s consolidated financial statements.
As a result of the Merger on November 16, 2018, the Company assumed the Ply Gem Group Pension Plan (the “Ply Gem Plan”) and the MW Manufacturers, Inc Retirement Plan (the “MW Plan”). The Ply Gem Plan was frozen during 1998, and no further increases in benefits for participants may occur as a result of increases in service years or compensation. The MW Plan was frozen for salaried participants during 2004 and non-salaried participants during 2005. No additional participants may enter the plan, but increases in benefits for participants as a result of increase in service years or compensation will occur.
The Company refers to the RCC Pension Plan, the CENTRIA Benefit Plans, the Ply Gem Plan and the MW Plan collectively as the “Defined Benefit Plans” in this Note.
Assumptions—Weighted average actuarial assumptions used to determine benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
|
|
OPEB Plans
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
October 28,
2018
|
|
December 31,
2019
|
|
December 31,
2018
|
|
October 28,
2018
|
|
Discount rate
|
3.30
|
%
|
|
4.25
|
%
|
|
4.40
|
%
|
|
3.20
|
%
|
|
4.05
|
%
|
|
4.20
|
%
|
Weighted average actuarial assumptions used to determine net periodic benefit cost (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
|
|
|
OPEB Plans
|
|
|
|
|
|
|
|
FY 2019
|
|
Transition Period
|
|
FY 2018
|
|
FY 2019
|
|
Transition Period
|
|
FY 2018
|
|
Discount rate
|
4.25
|
%
|
|
3.98
|
%
|
|
3.64
|
%
|
|
4.05
|
%
|
|
4.20
|
%
|
|
3.40
|
%
|
|
Expected return on plan assets
|
6.60
|
%
|
|
6.61
|
%
|
|
6.19
|
%
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
The basis used to determine the expected long-term rate of return on assets assumptions for the Defined Benefit Plans was recent market performance and historical returns. The assumptions for the plans are primarily long-term, prospective rates.
The health care cost trend rate assumed for 2020 is 6.50% and is assumed to decline each year to an ultimate trend rate of 4.00%, which is expected to be achieved in 2030.
A one-percentage-point change in assumed health care cost trend rates would have the following effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Percentage-Point
|
|
|
|
|
|
|
Increase
|
|
Decrease
|
|
Total service and interest cost components
|
|
$
|
24,957
|
|
|
$
|
(21,834)
|
|
|
Postretirement benefit obligation
|
|
741,171
|
|
|
(643,979)
|
|
Funded status—The changes in the projected benefit obligation, plan assets and funded status, and the amounts recognized on our consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
OPEB Plans
|
|
|
|
|
FY 2019
|
|
Transition Period
|
|
FY 2019
|
|
Transition Period
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
95,053
|
|
|
$
|
51,032
|
|
|
$
|
6,929
|
|
|
$
|
7,354
|
|
|
Service cost
|
42
|
|
|
7
|
|
|
22
|
|
|
4
|
|
|
Interest cost
|
3,897
|
|
|
359
|
|
|
262
|
|
|
48
|
|
|
Benefits paid
|
(6,218)
|
|
|
(662)
|
|
|
(802)
|
|
|
(139)
|
|
|
Actuarial (gains) losses
|
8,374
|
|
|
606
|
|
|
1,367
|
|
|
(338)
|
|
|
|
|
|
|
|
|
|
|
|
Additions due to Ply Gem merger
|
—
|
|
|
43,711
|
|
|
—
|
|
|
—
|
|
|
Benefit obligation at end of period
|
$
|
101,148
|
|
|
$
|
95,053
|
|
|
$
|
7,778
|
|
|
$
|
6,929
|
|
|
Accumulated benefit obligation at end of period
|
$
|
101,148
|
|
|
$
|
95,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of assets at beginning of period
|
$
|
76,222
|
|
|
$
|
47,725
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
13,625
|
|
|
(1,645)
|
|
|
—
|
|
|
—
|
|
|
Company contributions
|
2,477
|
|
|
—
|
|
|
802
|
|
|
140
|
|
|
Benefits paid
|
(6,219)
|
|
|
(662)
|
|
|
(802)
|
|
|
(140)
|
|
|
Additions due to Ply Gem merger
|
—
|
|
|
30,804
|
|
|
—
|
|
|
—
|
|
|
Fair value of assets at end of period
|
$
|
86,105
|
|
|
$
|
76,222
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period
|
$
|
(15,043)
|
|
|
$
|
(18,831)
|
|
|
$
|
(7,778)
|
|
|
$
|
(6,929)
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
6,319
|
|
|
$
|
3,920
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current liabilities
|
—
|
|
|
—
|
|
|
(740)
|
|
|
(838)
|
|
|
Noncurrent liabilities
|
(21,362)
|
|
|
(22,751)
|
|
|
(7,038)
|
|
|
(6,091)
|
|
|
|
$
|
(15,043)
|
|
|
$
|
(18,831)
|
|
|
$
|
(7,778)
|
|
|
$
|
(6,929)
|
|
Certain of our defined pension plans have projected benefit obligations in excess of the fair value of plan assets. For these plans, the projected benefit obligations and the fair value of plan assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Projected benefit obligations
|
$
|
87,059
|
|
|
$
|
81,828
|
|
|
Fair value of plan assets
|
65,698
|
|
|
59,077
|
|
|
Funded status
|
$
|
(21,361)
|
|
|
$
|
(22,751)
|
|
Plan assets—The investment policy is to maximize the expected return for an acceptable level of risk. Our expected long-term rate of return on plan assets is based on a target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels.
As of December 31, 2019 and 2018, the weighted average asset allocations by asset category for the Defined Benefit Plans were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment type
|
December 31,
2019
|
|
December 31,
2018
|
|
Equity securities
|
45
|
%
|
|
51
|
%
|
|
Debt securities
|
48
|
%
|
|
41
|
%
|
|
Master limited partnerships
|
1
|
%
|
|
2
|
%
|
|
Cash and cash equivalents
|
2
|
%
|
|
2
|
%
|
|
Real estate
|
2
|
%
|
|
2
|
%
|
|
Other
|
2
|
%
|
|
2
|
%
|
|
Total
|
100
|
%
|
|
100
|
%
|
The principal investment objectives are to ensure the availability of funds to pay pension and postretirement benefits as they become due under a broad range of future economic scenarios, to maximize long-term investment return with an acceptable level of risk based on our pension and postretirement obligations, and to be sufficiently diversified across and within the capital markets to mitigate the risk of adverse or unexpected results from one security class will not have an unduly detrimental impact. Each asset class has broadly diversified characteristics. Decisions regarding investment policy are made with an understanding of the effect of asset allocation on funded status, future contributions and projected expenses.
The plans strive to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. We regularly review our actual asset allocation and the investments are periodically rebalanced to our target allocation when considered appropriate. We have set the target asset allocation for the RCC Pension Plan as follows: 45% US bonds, 17% large cap US equities, 13% foreign equity, 5% master limited partnerships, 2% commodity futures, 4% real estate investment trusts, 8% emerging markets and 6% small cap US equities. The CENTRIA Benefit Plans have a target asset allocation of approximately 80%-85% equities and 15%-20% fixed income. The Ply Gem Plan and the MW Plan combined target allocation is as follows: 25% US large cap funds, 5% US mid cap funds, 3% US small cap funds, 15% international equity, 45% fixed income and 7% other investments.
The fair values of the assets of the Defined Benefit Plans at December 31, 2019 and 2018, by asset category and by levels of fair value, as further defined in Note 15 — Fair Value of Financial Instruments and Fair Value Measurements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
Asset category
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Cash and cash equivalents
|
$
|
1,487
|
|
|
$
|
—
|
|
|
$
|
1,487
|
|
|
$
|
1,909
|
|
|
$
|
—
|
|
|
$
|
1,909
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth funds
|
5,409
|
|
|
—
|
|
|
5,409
|
|
|
6,959
|
|
|
—
|
|
|
6,959
|
|
|
Real estate funds
|
1,409
|
|
|
—
|
|
|
1,409
|
|
|
1,202
|
|
|
—
|
|
|
1,202
|
|
|
Commodity linked funds
|
507
|
|
|
1,459
|
|
|
1,966
|
|
|
481
|
|
|
1,394
|
|
|
1,875
|
|
|
Equity income funds
|
12,857
|
|
|
1,707
|
|
|
14,564
|
|
|
12,662
|
|
|
1,502
|
|
|
14,164
|
|
|
Index funds
|
1,868
|
|
|
17
|
|
|
1,885
|
|
|
2,794
|
|
|
30
|
|
|
2,824
|
|
|
International equity funds
|
5,486
|
|
|
952
|
|
|
6,438
|
|
|
4,685
|
|
|
1,447
|
|
|
6,132
|
|
|
Fixed income funds
|
6,103
|
|
|
5,087
|
|
|
11,190
|
|
|
1,778
|
|
|
16,174
|
|
|
17,952
|
|
|
Master limited partnerships
|
1,245
|
|
|
—
|
|
|
1,245
|
|
|
1,241
|
|
|
—
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
—
|
|
|
30,172
|
|
|
30,172
|
|
|
—
|
|
|
13,270
|
|
|
13,270
|
|
|
Common/collective trusts
|
—
|
|
|
10,340
|
|
|
10,340
|
|
|
—
|
|
|
8,694
|
|
|
8,694
|
|
|
Total
|
$
|
36,371
|
|
|
$
|
49,734
|
|
|
$
|
86,105
|
|
|
$
|
33,711
|
|
|
$
|
42,511
|
|
|
$
|
76,222
|
|
Net periodic benefit cost —The components of the net periodic benefit cost were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
FY 2019
|
|
FY 2018
|
|
FY 2017
|
|
Transition Period
|
|
Service cost
|
$
|
42
|
|
|
$
|
87
|
|
|
$
|
97
|
|
|
$
|
7
|
|
|
Interest cost
|
3,897
|
|
|
1,976
|
|
|
2,055
|
|
|
359
|
|
|
Expected return on assets
|
(4,935)
|
|
|
(2,916)
|
|
|
(2,798)
|
|
|
(480)
|
|
|
Amortization of prior service cost (credit)
|
58
|
|
|
58
|
|
|
(9)
|
|
|
9
|
|
|
Amortization of loss
|
1,313
|
|
|
991
|
|
|
1,374
|
|
|
185
|
|
|
Net periodic benefit cost
|
$
|
375
|
|
|
$
|
196
|
|
|
$
|
719
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB Plans
|
|
|
|
|
|
|
|
|
FY 2019
|
|
FY 2018
|
|
FY 2017
|
|
Transition Period
|
|
Service cost
|
$
|
22
|
|
|
$
|
28
|
|
|
$
|
36
|
|
|
$
|
4
|
|
|
Interest cost
|
262
|
|
|
247
|
|
|
257
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
284
|
|
|
$
|
275
|
|
|
$
|
293
|
|
|
$
|
52
|
|
The amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit income are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
|
OPEB Plans
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Unrecognized actuarial loss
|
$
|
11,002
|
|
|
$
|
12,111
|
|
|
|
$
|
1,608
|
|
|
$
|
240
|
|
|
Unrecognized prior service cost
|
127
|
|
|
185
|
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
11,129
|
|
|
$
|
12,296
|
|
|
|
$
|
1,608
|
|
|
$
|
240
|
|
Unrecognized actuarial gains (losses), net of income tax, of $(2.0) million and $0.7 million during fiscal 2019 and the transition period ended December 31, 2018, respectively, are included in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).
The changes in plan assets and benefit obligation recognized in other comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
FY 2019
|
|
FY 2018
|
|
FY 2017
|
|
Transition Period
|
|
Net actuarial loss (gain)
|
$
|
(315)
|
|
|
$
|
(392)
|
|
|
$
|
(3,144)
|
|
|
$
|
2,731
|
|
|
Amortization of net actuarial gain (loss)
|
(1,313)
|
|
|
(991)
|
|
|
(1,374)
|
|
|
(185)
|
|
|
Amortization of prior service credit (cost)
|
(58)
|
|
|
(58)
|
|
|
9
|
|
|
(9)
|
|
|
New prior service credit
|
—
|
|
|
—
|
|
|
276
|
|
|
—
|
|
|
Total recognized in other comprehensive income (loss)
|
$
|
(1,686)
|
|
|
$
|
(1,441)
|
|
|
$
|
(4,233)
|
|
|
$
|
2,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB Plans
|
|
|
|
|
|
|
|
|
FY 2019
|
|
FY 2018
|
|
FY 2017
|
|
Transition Period
|
|
Net actuarial loss (gain)
|
$
|
1,367
|
|
|
$
|
203
|
|
|
$
|
(396)
|
|
|
$
|
(338)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
$
|
1,367
|
|
|
$
|
203
|
|
|
$
|
(396)
|
|
|
$
|
(338)
|
|
The estimated amortization for fiscal 2020 for amounts reclassified from accumulated other comprehensive income into the consolidated statement of operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
Amortization of prior service credit
|
$
|
63
|
|
|
$
|
—
|
|
|
Amortization of net actuarial loss
|
1,193
|
|
|
108
|
|
|
Total estimated amortization
|
$
|
1,256
|
|
|
$
|
108
|
|
We expect to contribute $5.2 million to the Defined Benefit Plans and $0.8 million to OPEB Plans in fiscal 2020. We expect the following benefit payments to be made (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ending
|
Defined
Benefit Plans
|
|
OPEB Plans
|
|
2020
|
$
|
6,552
|
|
|
$
|
752
|
|
|
2021
|
6,568
|
|
|
689
|
|
|
2022
|
6,601
|
|
|
604
|
|
|
2023
|
6,566
|
|
|
592
|
|
|
2024
|
6,467
|
|
|
513
|
|
|
2025 - 2029
|
31,078
|
|
|
2,158
|
|
Other Retirement Plans — As a result of the Merger on November 16, 2018, the Company assumed an unfunded nonqualified Supplemental Executive Retirement Plan for certain employees. The projected benefit obligation relating to this unfunded plan totaled approximately $304,000 and $289,000 at December 31, 2019 and 2018, respectively. The Company has recorded this obligation in other long term liabilities in the consolidated balance sheets as of December 31, 2019 and 2018. Pension expense for the plan was approximately $12,000 for the year ended December 31, 2019.
20. SEGMENT INFORMATION
Operating segments are defined as components of an enterprise that engage in business activities for which discrete financial information is available and is evaluated on a regular basis by the chief operating decision maker to make decisions regarding the allocation of resources to the segment and assess the performance of the segment. For the transition period ended December 31, 2018, the Company began reporting results under three reportable segments: Commercial, Siding and Windows. The Company’s prior reportable segments, Engineered Building Systems, Metal Components, Insulated Metal Panels, and Metal Coil Coating, are now collectively in the Commercial segment. Prior periods for all periods presented have been recast to conform to the current segment presentation. The Siding segment includes the operating results of the legacy Ply Gem operating segment of Siding, Fencing, and Stone, and the Windows segment includes the operating results of the legacy Ply Gem operating segment of Windows and Doors.
These operating segments follow the same accounting policies used for our consolidated financial statements. We evaluate a segment’s performance based primarily upon operating income before corporate expenses.
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. During fiscal 2019, the Company changed the manner in which costs were allocated to the Commercial segment for commercial cost centers that had previously been categorized as unallocated corporate costs. Corporate unallocated expenses include share-based compensation expenses, acquisition costs, and other expenses related to executive, legal, finance, tax, treasury, human resources, information technology and strategic sourcing, and corporate travel expenses. Additional unallocated amounts primarily include non-operating items such as interest income, interest expense, loss on extinguishment of debt and other income (expense).
Summary financial data attributable to the segments for the periods indicated is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29, 2018 -
December 31, 2018
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,847,893
|
|
|
$
|
2,000,577
|
|
|
$
|
1,770,278
|
|
|
$
|
286,522
|
|
|
Siding
|
1,111,407
|
|
|
—
|
|
|
—
|
|
|
82,974
|
|
|
Windows
|
1,930,447
|
|
|
—
|
|
|
—
|
|
|
190,374
|
|
|
Total net sales
|
$
|
4,889,747
|
|
|
$
|
2,000,577
|
|
|
$
|
1,770,278
|
|
|
$
|
559,870
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
201,073
|
|
|
$
|
230,365
|
|
|
$
|
189,547
|
|
|
$
|
11,784
|
|
|
Siding
|
66,273
|
|
|
—
|
|
|
—
|
|
|
(15,979)
|
|
|
Windows
|
92,538
|
|
|
—
|
|
|
—
|
|
|
(8,023)
|
|
|
Corporate
|
(145,148)
|
|
|
(104,445)
|
|
|
(79,767)
|
|
|
(51,198)
|
|
|
Total operating income (loss)
|
$
|
214,736
|
|
|
$
|
125,920
|
|
|
$
|
109,780
|
|
|
$
|
(63,416)
|
|
|
Unallocated other expense, net
|
(225,351)
|
|
|
(42,825)
|
|
|
(26,642)
|
|
|
(33,441)
|
|
|
Income (loss) before income taxes
|
$
|
(10,615)
|
|
|
$
|
83,095
|
|
|
$
|
83,138
|
|
|
$
|
(96,857)
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
44,550
|
|
|
$
|
40,536
|
|
|
$
|
40,488
|
|
|
$
|
6,820
|
|
|
Siding
|
121,004
|
|
|
—
|
|
|
—
|
|
|
11,793
|
|
|
Windows
|
94,737
|
|
|
—
|
|
|
—
|
|
|
11,893
|
|
|
Corporate
|
3,473
|
|
|
1,789
|
|
|
830
|
|
|
430
|
|
|
Total depreciation and amortization expense
|
$
|
263,764
|
|
|
$
|
42,325
|
|
|
$
|
41,318
|
|
|
$
|
30,936
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
51,144
|
|
|
$
|
36,943
|
|
|
$
|
20,348
|
|
|
$
|
5,660
|
|
|
Siding
|
22,695
|
|
|
—
|
|
|
—
|
|
|
1,178
|
|
|
Windows
|
43,408
|
|
|
—
|
|
|
—
|
|
|
5,788
|
|
|
Corporate
|
3,838
|
|
|
10,884
|
|
|
1,726
|
|
|
960
|
|
|
Total capital expenditures
|
$
|
121,085
|
|
|
$
|
47,827
|
|
|
$
|
22,074
|
|
|
$
|
13,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
$
|
238,133
|
|
|
$
|
216,685
|
|
|
Siding
|
|
|
|
|
|
|
160,524
|
|
|
162,273
|
|
|
Windows
|
|
|
|
|
|
|
232,855
|
|
|
213,694
|
|
|
Corporate
|
|
|
|
|
|
|
21,329
|
|
|
21,355
|
|
|
Total property, plant and equipment, net
|
|
|
|
|
|
|
$
|
652,841
|
|
|
$
|
614,007
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
$
|
963,291
|
|
|
$
|
951,046
|
|
|
Siding
|
|
|
|
|
|
|
2,289,310
|
|
|
2,119,366
|
|
|
Windows
|
|
|
|
|
|
|
2,166,220
|
|
|
1,894,732
|
|
|
Corporate
|
|
|
|
|
|
|
145,525
|
|
|
176,043
|
|
|
Total assets
|
|
|
|
|
|
|
$
|
5,564,346
|
|
|
$
|
5,141,187
|
|
Summary financial data attributable to various geographic regions for the periods indicated is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
October 28,
2018
|
|
October 29,
2017
|
|
October 29, 2018 -
December 31, 2018
|
|
Total sales:
|
|
|
|
|
|
|
|
|
United States of America
|
$
|
4,526,385
|
|
|
$
|
1,874,129
|
|
|
$
|
1,666,645
|
|
|
$
|
514,306
|
|
|
Canada
|
340,250
|
|
|
99,306
|
|
|
73,090
|
|
|
42,861
|
|
|
China
|
1
|
|
|
4
|
|
|
8,923
|
|
|
—
|
|
|
Mexico
|
3,381
|
|
|
2,460
|
|
|
4,910
|
|
|
285
|
|
|
All other
|
19,730
|
|
|
24,678
|
|
|
16,710
|
|
|
2,418
|
|
|
Total net sales
|
$
|
4,889,747
|
|
|
$
|
2,000,577
|
|
|
$
|
1,770,278
|
|
|
$
|
559,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States of America
|
|
|
|
|
|
|
$
|
3,692,015
|
|
|
|
$
|
3,556,965
|
|
|
Canada
|
|
|
|
|
|
|
359,249
|
|
|
|
356,296
|
|
|
Costa Rica
|
|
|
|
|
321
|
|
|
|
216
|
|
|
Mexico
|
|
|
|
|
|
|
11,550
|
|
|
|
10,642
|
|
|
Total long-lived assets
|
|
|
|
|
|
|
$
|
4,063,135
|
|
|
|
$
|
3,924,119
|
|
Sales are determined based on customers’ requested shipment location.
21. 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 and/or its subsidiaries become involved in various legal proceedings or other contingent matters arising from claims or potential claims. The Company insures against these risks to the extent deemed prudent by its management and to the extent insurance is available. Many of these insurance policies contain deductibles or self-insured retentions in amounts the Company deems prudent and for which the Company is responsible for payment. In determining the amount of self-insurance, it is the Company’s policy to self-insure those losses that are predictable, measurable and recurring in nature. The Company regularly reviews the status of ongoing proceedings and other contingent matters with its legal counsel. Liabilities for such items are recorded when it is probable that the liability will be incurred and when the amount of the liability can be reasonably estimated. Liabilities are adjusted when additional information becomes 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 are not predictable.
Environmental
The Company is subject to United States and Canadian federal, state, provincial and local laws and regulations relating to pollution and the protection of the environment, including those governing emissions to air, discharges to water, use, storage, treatment, disposal and transport of hazardous waste and other materials, investigation and remediation of contaminated sites, and protection of worker health and safety. From time to time, the Company’s facilities are subject to investigation by governmental authorities. In addition, the Company has been identified as one of many potentially responsible parties for contamination present at certain offsite locations to which it or its predecessors are alleged to have sent hazardous materials for recycling or disposal. The Company may be held liable, or incur fines or penalties, in connection with such requirements or liabilities for, among other things, releases of hazardous substances occurring on or emanating from current or formerly owned or operated properties or any associated offsite disposal location, or for known or newly-discovered contamination at any of the Company’s properties from activities conducted by it or previous occupants. The amount of any liability, fine or penalty may be material, and certain environmental laws impose strict, and under certain circumstances joint and several, liability for the cost of addressing releases of hazardous substances upon certain classes of persons, including site owners or operators and persons that disposed or arranged for the disposal of hazardous substances at contaminated sites.
One of the Company’s subsidiaries entered into an Administrative Order on Consent (the “Consent Order”), effective September 12, 2011, with the United States Environmental Protection Agency (“EPA”), under the Resource Conservation and Recovery Act (“RCRA”), with respect to its Rocky Mount, Virginia property. During 2011, as part of the Consent Order, the Company provided the EPA, among other things, a RCRA Facility Investigation Workplan (the “Workplan”). In 2012, the EPA approved the Workplan, which the Company is currently implementing. Current estimates of remaining costs for predicted assessment, remediation and monitoring activities as of December 31, 2019 are $4.5 million. The Company has recorded approximately $1.0 million of this environmental liability within current liabilities at December 31, 2019 and approximately $3.5 million within other long-term liabilities in the Company’s consolidated balance sheets at December 31, 2019. The Company may incur costs that exceed its recorded environmental liability. The Company will adjust its environmental remediation liability in future periods, if necessary, as further information develops or circumstances change.
The EPA is investigating groundwater contamination at a Superfund site in York, Nebraska referred to as the “PCE/TCE Northeast Contamination Site”. A subsidiary of the Company has been named a potentially responsible party (“PRP”) with respect to the PCE/TCE Northeast Contamination Site. As a PRP, the Company could have liability for investigation and remediation costs associated with the contamination. Given the current status of this matter, the Company has recorded a liability of $4.6 million within other current liabilities in its consolidated balance sheets as of December 31, 2019.
The Company is a party to various acquisition and other agreements pursuant to which third parties agreed to indemnify the Company for certain costs relating to environmental liabilities. For example, the Company may be able to recover some of its Rocky Mount, Virginia investigation and remediation costs from U.S. Industries, Inc. and may be able to recover a portion of costs incurred in connection with the York, Nebraska contamination matter from Novelis Corporation as successor to Alcan Aluminum Corporation, the former owner of the York, Nebraska location. The Company’s ability to seek indemnification from parties that have agreed to indemnify it may be limited. There can be no assurance that the Company would receive any funds from these parties, and any related environmental liabilities or costs could have a material adverse effect on our financial condition and results of operations.
Based on current information, the Company is not aware of any environmental compliance obligations, claims or investigations that will have a material adverse effect on its results of operations, cash flows or financial position except as otherwise disclosed in the Company’s consolidated financial statements. However, there can be no guarantee that previously known or newly-discovered matters will not result in material costs or liabilities.
Litigation
The Company believes it has valid defenses to the outstanding claims discussed below and will vigorously defend all such claims; however, litigation is subject to many uncertainties and there cannot be any assurance that the Company will ultimately prevail or, in the event of an unfavorable outcome or settlement of litigation, that the ultimate liability would not be material and would not have a material adverse effect on the business, results of operations, cash flows or financial position of the Company.
In November 2018, Aurora Plastics, LLC (“Aurora”) initiated an arbitration demand against Atrium Windows and Doors, Inc., Atrium Extrusion Systems, Inc., and North Star Manufacturing (London) Ltd. (collectively, “Atrium”) pursuant to a Third Amended and Restated Vinyl Compound and Supply Agreement dated as of December 22, 2016. A settlement was reached in this case during the fourth quarter of 2019 which resulted in the Company having a $11.2 million liability as of December 31, 2019, of which $3.6 million is held within other current liabilities with the remaining in long-term liabilities in the consolidated balance sheets.
On November 14, 2018, an individual stockholder, Gary D. Voigt, filed a putative class action Complaint in the Delaware Court of Chancery against Clayton Dubilier & Rice, LLC (“CD&R”), Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”), and certain directors of the Company. Voigt purports to assert claims on behalf of himself, on behalf of a class of other similarly situated stockholders of the Company, and derivatively on behalf of the Company, the nominal defendant. An Amended Complaint was filed on April 11, 2019. The Amended Complaint asserts claims for breach of fiduciary duty and unjust enrichment against CD&R Fund VIII and CD&R, and for breach of fiduciary duty against twelve director defendants in connection with the Merger. Voigt seeks damages in an amount to be determined at trial. Defendants moved to dismiss the Amended Complaint and, on February 10, 2020, the court denied the motions except as to four of the director defendants. Defendants are due to answer on April 3, 2020. The Company intends to vigorously defend the litigation.
Other contingencies
The Company’s imports of fabricated structural steel (“FSS”) from its Mexican affiliate, Building Systems de Mexico S.A. de C.V. (“BSM”) were subject to antidumping (“AD”) and countervailing duty (“CVD”) tariff proceedings before the U.S. Department of Commerce (“DOC”) and the U.S. International Trade Commission (“USITC”). Neither of these proceedings were directly aimed at the Company. Rather, the proceedings were brought by the American Institute of Steel Construction in February 2019 against FSS being imported into the USA from Mexico, Canada, and China, not individual companies. In 2019, the DOC issued preliminary tariff rates and in 2020 finalized CVD and AD tariff rates of 0% and 8.47%, respectively, for the Company’s imports of FSS from BSM. However, in February 2020, in a 3 to 2 vote, the USITC concluded there was no injury or threat of injury to the domestic FSS industry. Once the USITC opinion is published the AD and CVD tariffs will cease to be applicable to BSM and the Company will seek recovery of those nominal funds deposited with United States Customs and Border Protection related to these tariffs on its importation of FSS from BSM. In the event the USITC decision is appealed, the Company will continue to vigorously advocate its position that its import of FSS from BSM should not be subject to any CVD or AD tariffs.
The Company is subject to other contingencies, including legal proceedings and 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. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company has used various substances in products and manufacturing operations, which have been or may be deemed to be hazardous or dangerous, and the extent of its potential liability, if any, under environmental, product liability and workers’ compensation statutes, rules, regulations and case law is unclear. Further, due to the lack of adequate information and the potential impact of present regulations and any future regulations, there are certain circumstances in which no range of potential exposure may be reasonably estimated. Also, it is not possible to ascertain the ultimate legal and financial liability with respect to certain contingent liabilities, including lawsuits, and therefore no such estimate has been made as of December 31, 2019.
22. QUARTERLY RESULTS (Unaudited)
Shown below are selected unaudited quarterly data (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
Sales
|
$
|
1,064,832
|
|
|
$
|
1,295,457
|
|
|
$
|
1,285,043
|
|
|
$
|
1,244,415
|
|
|
|
|
Gross profit
|
$
|
185,917
|
|
|
$
|
304,663
|
|
|
$
|
309,803
|
|
|
$
|
288,036
|
|
|
|
|
Net income (loss)
|
$
|
(60,017)
|
|
|
$
|
17,533
|
|
|
$
|
25,164
|
|
|
$
|
1,930
|
|
|
|
|
Net income allocated to participating securities
|
$
|
—
|
|
|
$
|
(270)
|
|
|
$
|
(374)
|
|
|
$
|
(27)
|
|
|
|
|
Net income (loss) applicable to common shares(3)
|
$
|
(60,017)
|
|
|
$
|
17,263
|
|
|
$
|
24,790
|
|
|
$
|
1,903
|
|
|
|
|
Income (loss) per common share:(1)(2)
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.48)
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
$
|
0.02
|
|
|
|
|
Diluted
|
$
|
(0.48)
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
October 29, 2018 - December 31, 2018
|
|
Sales
|
$
|
421,349
|
|
|
$
|
457,069
|
|
|
$
|
548,525
|
|
|
$
|
573,634
|
|
|
$
|
559,870
|
|
|
Gross profit
|
$
|
91,917
|
|
|
$
|
104,083
|
|
|
$
|
133,401
|
|
|
$
|
133,281
|
|
|
$
|
84,090
|
|
|
Net income (loss)
|
$
|
5,249
|
|
|
$
|
(5,684)
|
|
|
$
|
35,986
|
|
|
$
|
27,555
|
|
|
$
|
(76,190)
|
|
|
Net income allocated to participating securities
|
$
|
(38)
|
|
|
$
|
—
|
|
|
$
|
(221)
|
|
|
$
|
(138)
|
|
|
$
|
—
|
|
|
Net income (loss) applicable to common shares(3)
|
$
|
5,211
|
|
|
$
|
(5,684)
|
|
|
$
|
35,765
|
|
|
$
|
27,417
|
|
|
$
|
(76,190)
|
|
|
Income (loss) per common share:(1)(2)
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.08
|
|
|
$
|
(0.09)
|
|
|
$
|
0.54
|
|
|
$
|
0.41
|
|
|
$
|
(0.71)
|
|
|
Diluted
|
$
|
0.08
|
|
|
$
|
(0.09)
|
|
|
$
|
0.54
|
|
|
$
|
0.41
|
|
|
$
|
(0.71)
|
|
(1)The sum of the quarterly income (loss) per share amounts may not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year based on the respective weighted average common shares outstanding.
(2)Excludes net income allocated to participating securities. The participating securities are treated as a separate class in computing earnings per share (see Note 9 — Earnings per Common Share).
(3)The quarterly income (loss) before income taxes were impacted by the following special income (expense) items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
Restructuring and impairment charges, net
|
$
|
(3,431)
|
|
|
$
|
(7,107)
|
|
|
$
|
(4,984)
|
|
|
$
|
(2,538)
|
|
|
|
|
Strategic development and acquisition related costs
|
(14,082)
|
|
|
(12,086)
|
|
|
(10,500)
|
|
|
(13,517)
|
|
|
|
|
Non-cash charge of purchase price allocated to inventories
|
(16,249)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special expense items in income (loss) before income taxes
|
$
|
(33,762)
|
|
|
$
|
(19,193)
|
|
|
$
|
(15,484)
|
|
|
$
|
(16,055)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
October 29, 2018 - December 31, 2018
|
|
Restructuring charges and impairment charges, net
|
$
|
(1,094)
|
|
|
$
|
(488)
|
|
|
$
|
439
|
|
|
$
|
(769)
|
|
|
$
|
(1,253)
|
|
|
Strategic development and acquisition related costs
|
(727)
|
|
|
(1,134)
|
|
|
(3,642)
|
|
|
(11,661)
|
|
|
(29,094)
|
|
|
Gain (loss) on disposition of business
|
—
|
|
|
(6,686)
|
|
|
1,013
|
|
|
—
|
|
|
(1,244)
|
|
|
Loss on extinguishment of debt
|
—
|
|
|
(21,875)
|
|
|
—
|
|
|
—
|
|
|
(3,284)
|
|
|
Acceleration of CEO retirement benefits
|
(4,600)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Gain on insurance recovery
|
—
|
|
|
—
|
|
|
4,741
|
|
|
—
|
|
|
—
|
|
|
Discrete tax effects of U.S. tax reform
|
323
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Non-cash charge of purchase price allocated to inventories
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(21,617)
|
|
|
Litigation settlement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(3,235)
|
|
|
Total special income (expense) items in income (loss) before income taxes
|
$
|
(6,098)
|
|
|
$
|
(30,183)
|
|
|
$
|
2,551
|
|
|
$
|
(12,430)
|
|
|
$
|
(59,727)
|
|
23. SUBSEQUENT EVENTS
On March 2, 2020, the Company agreed to terms to purchase Kleary Masonry, Inc. ("Kleary"), based in Sacramento, California for $40.0 million plus future consideration. Kleary is a leading installer of manufactured stone veneer in Northern California and its addition to the Company's Siding segment further enhances our market leading turnkey stone veneer offering.