Results

Cornerstone Building Brands Inc.

11/12/2024 | Press release | Distributed by Public on 11/12/2024 15:03

Quarterly Report for Quarter Ending September 28, 2024 (Form 10-Q)

cnr-20240928
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2024
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-14315
Cornerstone Building Brands, Inc.
(Exact name of registrant as specified in its charter)
Delaware 76-0127701
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification No.)
5020 Weston Parkway Suite 400 Cary NC 27513
(Address of principal executive offices) (Zip Code)
(866) 419-0042
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨No ý
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ýYes ¨No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer ☐
Non-accelerated filer
ý(Do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ýNo
APPLICABLE ONLY TO CORPORATE ISSUERS
There are no longer publicly traded shares of common stock of Cornerstone Building Brands, Inc.
Table of Contents
TABLE OF CONTENTS
Part I - Unaudited Financial Information
Item 1.
Condensed Consolidated Financial Statements
1
Condensed Consolidated Statements of (Loss) Income
1
Condensed Consolidated Statements of Comprehensive Loss
2
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Equity
4
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
Item 4.
Controls and Procedures
32
Part II - Other Information
Item 1.
Legal Proceedings
34
Item 1A.
Risk Factors
34
Item 6.
Exhibits
36
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PART I - UNAUDITED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales $ 1,431,356 $ 1,424,758 $ 3,941,345 $ 4,132,064
Cost of sales 1,154,794 1,091,691 3,114,096 3,219,299
Gross profit 276,562 333,067 827,249 912,765
Selling, general and administrative expenses 671,281 228,621 1,159,155 703,428
Loss on divestiture - 10,080 - 10,080
Income (loss) from operations (394,719) 94,366 (331,906) 199,257
Interest expense (124,120) (91,013) (325,687) (277,438)
Foreign exchange gain (loss) 782 (3,753) (6,004) 2,694
Loss on extinguishment of debt - - - (184)
Other income, net 994 4,027 4,550 8,832
Income (loss) before income taxes (517,063) 3,627 (659,047) (66,839)
Income tax expense (benefit) (40,029) 890 (56,219) (18,435)
Net income (loss) $ (477,034) $ 2,737 $ (602,828) $ (48,404)
See accompanying notes to the condensed consolidated financial statements.
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CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net income (loss) $ (477,034) $ 2,737 $ (602,828) $ (48,404)
Other comprehensive loss, net of tax:
Foreign exchange translation gain (loss) 1,221 (6,059) (1,049) (6,539)
Unrealized gain (loss) on derivative instruments, net of income tax of $7,001, $114, $5,109 and $(1,105)
(23,381) (373) (17,087) 3,589
Other comprehensive loss (22,160) (6,432) (18,136) (2,950)
Comprehensive loss $ (499,194) $ (3,695) $ (620,964) $ (51,354)
See accompanying notes to the condensed consolidated financial statements.
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CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
September 28, 2024 December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents $ 158,295 $ 468,877
Accounts receivable, net 714,963 596,621
Inventories 686,588 496,839
Other current assets 94,810 73,987
Total current assets 1,654,656 1,636,324
Property, plant and equipment, net 1,133,891 889,103
Lease right-of-use assets 532,568 365,292
Goodwill 1,619,648 1,681,764
Intangible assets, net 2,430,464 2,286,068
Other assets, net 68,160 74,790
Total assets $ 7,439,387 $ 6,933,341
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 34,000 $ 29,000
Short-term borrowings 205,000 -
Current portion of lease liabilities 81,731 64,711
Accounts payable 263,852 255,227
Accrued income and other taxes 39,726 57,058
Employee-related liabilities 88,021 113,081
Rebates, warranties and other customer-related liabilities 193,101 151,990
Other current liabilities 98,837 129,327
Total current liabilities 1,004,268 800,394
Long-term debt 4,415,146 3,382,550
Long-term lease liabilities 420,670 287,304
Deferred income tax liabilities 543,811 556,935
Other long-term liabilities 258,729 261,288
Total liabilities $ 6,642,624 $ 5,288,471
Commitments and contingencies (Note 13)
Equity:
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding at September 28, 2024 and December 31, 2023
$ - $ -
Additional paid-in capital 1,538,881 1,766,024
Accumulated deficit (741,849) (139,021)
Accumulated other comprehensive income (loss) (269) 17,867
Total equity 796,763 1,644,870
Total liabilities and equity $ 7,439,387 $ 6,933,341
See accompanying notes to the condensed consolidated financial statements.
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CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
(Unaudited)
Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Equity
Shares Amount
Balance, June 29, 2024 1,000 $ - $ 1,537,176 $ (264,815) $ 21,891 $ 1,294,252
Other comprehensive loss - - - - (22,160) (22,160)
Share-based compensation - - 1,705 - - 1,705
Net loss - - - (477,034) - (477,034)
Balance, September 28, 2024 1,000 $ - $ 1,538,881 $ (741,849) $ (269) $ 796,763
Balance, July 1, 2023 1,000 $ - $ 1,762,739 $ (114,637) $ 37,991 $ 1,686,093
Other comprehensive loss - - - - (6,432) (6,432)
Share-based compensation - - 1,857 - - 1,857
Net income - - - 2,737 - 2,737
Balance, September 30, 2023 1,000 $ - $ 1,764,596 $ (111,900) $ 31,559 $ 1,684,255
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CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
(Unaudited)
Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Equity
Shares Amount
Balance, December 31, 2023 1,000 $ - $ 1,766,024 $ (139,021) $ 17,867 $ 1,644,870
Other comprehensive loss - - - - (18,136) (18,136)
Share-based compensation - 4,482 - - 4,482
Dividend to Parent - - (231,625) - - (231,625)
Net loss - - - (602,828) - (602,828)
Balance, September 28, 2024 1,000 $ - $ 1,538,881 $ (741,849) $ (269) $ 796,763
Balance, December 31, 2022 1,000 $ - $ 1,757,932 $ (63,496) $ 34,509 $ 1,728,945
Other comprehensive loss - - - - (2,950) (2,950)
Share-based compensation - - 6,834 - - 6,834
Other - - (170) - - (170)
Net loss - - - (48,404) - (48,404)
Balance, September 30, 2023 1,000 $ - $ 1,764,596 $ (111,900) $ 31,559 $ 1,684,255
See accompanying notes to the condensed consolidated financial statements.
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CORNERSTONE BUILDING BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 28, 2024 September 30, 2023
Cash flows from operating activities:
Net loss $ (602,828) $ (48,404)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 296,441 331,077
Amortization of debt issuance costs, debt discount and fair values 74,629 68,192
Impairment of goodwill and intangible assets 415,491 -
Share-based compensation expense 4,482 6,834
Non-cash lease expense 4,560 5,173
Loss on extinguishment of debt - 184
Loss on divestiture - 10,080
Loss on sale of assets 2,212 260
Amortization of inventory and other fair value step ups 11,949 -
Change in fair value of contingent consideration 4,856 -
Unrealized (gain) loss on foreign currency exchange rates 6,004 (2,200)
Provision for credit losses 5,982 5,249
Deferred income taxes (121,222) (90,903)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (94,838) (62,914)
Inventories (57,479) 46,758
Income taxes (28,875) 22,100
Prepaid expenses and other current assets (6,096) 14,515
Accounts payable (8,198) (21,146)
Accrued expenses (65,275) (84,882)
Other, net (19,357) (18,351)
Net cash flows from operating activities (177,562) 181,622
Cash flows from investing activities:
Acquisitions, net of cash acquired (929,801) (67,834)
Capital expenditures (155,820) (125,700)
Final settlement on divestiture - (10,080)
Proceeds from sale of property, plant and equipment 5,056 -
Net cash flows from investing activities
(1,080,565) (203,614)
Cash flows from financing activities:
Proceeds from short-term borrowings 1,200,000 -
Repayments of short-term borrowings (995,000) -
Proceeds from term loans 500,000 -
Payments on term loans (14,500) (21,750)
Proceeds from senior notes 500,000 -
Repurchases of senior notes - (33,885)
Payments of financing costs (12,335) -
Dividend payment to parent (231,625) -
Net cash flows from financing activities
946,540 (55,635)
Effect of exchange rate changes on cash and cash equivalents 1,005 (104)
Net decrease in cash and cash equivalents (310,582) (77,731)
Cash and cash equivalents at beginning of period 468,877 553,551
Cash and cash equivalents at end of period $ 158,295 $ 475,820
See accompanying notes to the condensed consolidated financial statements.
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CORNERSTONE BUILDING BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 1 - Basis of Presentation
Description of Business
Cornerstone Building Brands, Inc. ("Cornerstone Building Brands" or, collectively with its subsidiaries, unless the context requires otherwise, the "Company") is a holding company incorporated in Delaware. The Company is a leading exterior building products manufacturer by sales in North America and serves residential and commercial customers across new construction and the repair and remodel end markets. The Company is organized into three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are presented in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These Condensed Consolidated Financial Statements have been prepared in accordance with the Company's accounting policies and on the same basis as those financial statements included in the Company's latest Annual Report on Form 10-K for the year ended December 31, 2023, and should be read in conjunction with those Consolidated Financial Statements and the Notes thereto. Certain disclosures normally included in the Company's Consolidated Financial Statements prepared in accordance with U.S. GAAP have been omitted on a basis consistent with the rules and regulations of the SEC.
The accompanying Condensed Consolidated Financial Statements include the accounts and operations of the Company and its majority-owned subsidiaries and all adjustments (consisting of normal recurring adjustments) that the Company considered necessary to present a fair statement of its results of operations, financial position and cash flows. All significant intercompany accounts and transactions have been eliminated in consolidation.
Note 2 - Significant Accounting Policies
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, net sales and expenses and related disclosures of contingent assets and liabilities in the Condensed Consolidated Financial Statements and accompanying notes. These estimates include, but are not limited to: establishing the allowance for expected credit losses; allowance for obsolete inventory; the impairment of goodwill and intangible assets; establishing useful lives for and evaluating the recovery of long-lived assets; recognizing the fair value of assets acquired and liabilities assumed in business combinations; determining the fair value of contingent considerations; accounting for rebates and product warranties; the valuation and expensing for share-based compensation; certain assumptions made in accounting for pension benefits; accounting for contingencies and uncertainties; and accounting for income taxes. Actual results may differ from the estimates used in preparing the Condensed Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents mainly consist of highly liquid, unrestricted savings, checking, money market funds with original maturities of less than three months and other bank accounts.
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The following table sets forth the components of cash and cash equivalents:
September 28,
2024 		December 31,
2023
Cash $ 158,295 $ 228,975
Money market funds (Level 1 securities) - 239,902
Total cash and cash equivalents $ 158,295 $ 468,877
Accounts Receivable, Net
The Company reports accounts receivable net of an allowance for expected credit losses. The Company establishes provisions for expected credit losses based on the Company's assessment of the collectability of amounts owed to the Company by its customers. Such allowances are included in selling, general and administrative expenses in the Company's Condensed Consolidated Statements of Loss. In establishing the allowance, the Company considers changes in the financial position of a customer, age of the accounts receivable balances, availability of security, unusual macroeconomic conditions, lien rights and bond rights as well as disputes, if any, with its customers. 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 or any legal action taken by the Company has concluded.
Fair Value Measurements
U.S. GAAP requires us to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
Level 1 - Observable inputs such as quoted prices for identical assets or liabilities in active markets.
Level 2 - Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs.
Level 3 - Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants would price the assets or liabilities.
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximate fair value as of September 28, 2024 and December 31, 2023 given the instruments' relatively short maturities. The carrying amounts of the indebtedness under revolving credit facilities approximate fair value as the interest rates are variable and reflective of market rates. Fair values for our other debt instruments are measured using Level 1 and Level 2 inputs.
In connection with certain business acquisitions, the Company periodically enters into agreements that require us to pay additional consideration to the relevant seller. These payments are contingent on the achievement of specified EBITDA targets in periods subsequent to the acquisition. The fair value of contingent consideration is based on unobservable, or Level 3, inputs including a probability-weighted average payout approach. Contingent consideration obligations are measured at fair value each reporting period and any adjustments to fair value are recognized in earnings in the period they are identified. The Company has not made any changes to the methods used to determine the fair value of its contingent consideration obligations.
Business Combinations
We account for business combinations under the acquisition method of accounting, which requires an allocation of the consideration we paid to the identifiable assets, intangible assets and liabilities based on the estimated fair values as of the closing date of the acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets, intangible assets and liabilities is recorded as goodwill.
Purchased intangibles other than goodwill are initially recognized at fair value and amortized over their useful lives unless those lives are determined to be indefinite. The valuation of acquired assets will impact future operating results. The fair value of identifiable intangible assets is determined using an income approach on an individual asset basis. Specifically, we use the multi-period excess earnings method to determine the fair value of customer relationships and the relief-from-royalty approach to determine the fair value of trade names. Determining the fair value of acquired intangibles involves significant estimates and assumptions, including forecasted revenue growth rates, margins, percentage of revenue attributable to the trade name, contributory asset charges, customer attrition rate, market-participant discount rates, the assumed royalty rates and income tax rates.
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The determination of the useful life of an intangible asset other than goodwill is based on factors including historical trade name performance with respect to consumer name recognition, geographic market presence, market share, plans for ongoing trade name support and promotion, customer attrition rate, and other relevant factors.
The initial purchase price allocation is based upon provisional information and is subject to revision during the measurement period (up to one year from the acquisition date) as additional information concerning valuations is obtained. As the Company obtains new information regarding facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities, the Company will accordingly revise the provisional purchase price allocation. These adjustments may include, but are not limited to, adjustments pertaining to intangible assets acquired, property, plant and equipment acquired and tax liabilities assumed.
Recent Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update ("ASU") No. 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of a segment's profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment's profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements. The ASU will likely result in us including the additional required disclosures when adopted. We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31, 2024.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which establishes new income tax disclosure requirements in addition to modifying and eliminating certain existing requirements. The new guidance requires consistent categorization and greater disaggregation of information in the rate reconciliation, as well as further disaggregation of income taxes paid. This change is effective for annual periods beginning after December 15, 2024. Prospective application is required, with retrospective application permitted. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures.
Note 3 - Acquisitions
Acquisition of Mueller Supply Company, Inc.
In July 2024, the Company completed the acquisition of Mueller Supply Company, Inc. ("Mueller") for a purchase price of $497.1 million, including a base purchase price of $475.0 million, in addition to closing date cash and working capital adjustments. Mueller is a leading manufacturer of residential metal roofing and components and steel buildings in Texas and the Southwest United States ("U.S."). Mueller has approximately 900 employees and a comprehensive regional footprint including 38 retail branches and five manufacturing sites in Amarillo, Ballinger and Huntsville, Texas; Oak Grove, Louisiana; and Phoenix, Arizona. This acquisition was funded through issuing long-term debt further discussed in Note 7. Mueller is included in the Company's Shelter Solutions reportable segment.
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The following table summarizes the provisional fair value of net assets acquired:
Fair Value
Cash and cash equivalent $ 18,074
Accounts receivable 10,346
Inventories 126,507
Property, plant and equipment 190,383
Goodwill 137,421
Trade name and customer relationship intangibles 88,000
Equity investment 11,000
Other assets 5,803
Total assets acquired 587,534
Accounts payable and other liabilities assumed 6,172
Employee related liabilities 7,509
Rebates and customer related liabilities 17,698
Deferred income tax liabilities 59,099
Total liabilities assumed 90,478
Net assets acquired $ 497,056
As part of the Mueller transaction, the Company acquired a 33.33% interest in BDM Metal Coaters, LLC ("BDM"). The general purpose of BDM is the establishment and operation of a processing facility for the slitting and coating of hot roll steel coils. The Company does not exercise significant influence over BDM's operating and financial activities; therefore, the Company accounts for the investment under the equity method of accounting. The carrying value of the investment of $10.6 million is recognized in other asset, net on our Condensed Consolidated Balance Sheets for the period ended September 28, 2024.
The provisional fair value and expected useful life of identifiable intangible assets consists of the following:
Fair Value
Useful Life in Years
Customer relationships $ 25,000 10
Trade names and other 63,000 11
Total $ 88,000
The acquisition of Mueller resulted in the recognition of $137.4 million of goodwill. The goodwill recorded is a result of expected synergies and other benefits that we believe will result from the integration of the acquisition within our operations. Goodwill created as a result of the acquisition of Mueller is not expected to be deductible for tax purposes. A net deferred tax liability of $59.1 million was established as a result of the acquisition.
Acquisition of Harvey Building Products Corp.
In April 2024, the Company completed the acquisition of Harvey Building Products Corp. ("Harvey") for a purchase price of $460.7 million, subject to certain customary adjustments. Harvey is a manufacturer of high performing windows and doors, and its portfolio of industry leading brands include Harvey, Softlite and Thermo-Tech. Headquartered in Waltham, Massachusetts, Harvey has approximately 1,200 employees at four manufacturing facilities located throughout the Northeast and Midwest. Harvey specializes in premium, custom windows and doors primarily serving the Eastern U.S. This acquisition was funded through issuing long-term debt further discussed in Note 7. Harvey is included in the Company's Aperture Solutions reportable segment.
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The following table summarizes the provisional fair value of net assets acquired:
Fair Value
Cash and cash equivalent $ 10,423
Accounts receivable 27,395
Inventories 20,251
Property, plant and equipment 47,478
Lease right-of-use assets 126,609
Goodwill 175,871
Trade name and customer relationship intangibles 246,000
Other assets 14,991
Total assets acquired 669,018
Accounts payable and other liabilities assumed 36,448
Employee related liabilities 6,230
Lease liabilities 106,613
Deferred income tax liabilities 59,065
Total liabilities assumed 208,356
Net assets acquired $ 460,662
During the three months ended September 28, 2024, the Company recognized an $86.7 million increase in intangible assets, an increase of $21.1 million related to all other assets, an increase of $24.5 million in deferred tax liabilities and net decrease of $12.4 million in accounts payable and other liabilities assumed. Recognized goodwill decreased by $96.0 million as a result of these measurement period adjustments. The Company recorded these measurement price adjustments to update the allocation of the purchase price based upon further analysis of information subsequent to the acquisition date, inclusive of net working capital adjustments. These adjustments did not have a material impact on the Company's Condensed Consolidated Statements of Loss for the three and nine months ended September 28, 2024.
The provisional fair value and expected useful life of identifiable intangible assets consists of the following:
Fair Value Useful Life in Years
Customer relationships $ 200,000 12
Trade names and other 46,000 12
Total $ 246,000
The acquisition of Harvey resulted in the recognition of $175.9 million of goodwill. The goodwill recorded is a result of expected synergies and other benefits that we believe will result from the integration of the acquisition with our operations. Goodwill created as a result of the acquisition of Harvey is not expected to be deductible for tax purposes. A net deferred tax liability of $59.1 million was established as a result of the acquisition.
Acquisitions Completed During the Prior Year
In December 2023, the Company completed the acquisition of the Eastern Architectural Systems ("EAS") business, whose operations are included in the Company's Aperture Solutions reportable segment. EAS is based in Ft. Myers, Florida and manufactures custom-made aluminum and vinyl impact windows and doors. In August 2023, the Company completed the acquisition of M.A.C. Métal Architectural Inc. ("MAC Metal"), which became an indirect wholly-owned subsidiary of the Company. Headquartered in Saint-Hubert, Quebec, MAC Metal serves the North American residential and commercial markets with high-end steel siding and roofing products. MAC Metal is included in the Company's Surface Solutions reportable segment.
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The total purchase price for these acquisitions was $235.5 million, comprised of upfront cash payments of $217.7 million and earn-out contingent consideration of $16.8 million related to the MAC Metal transaction. The purchase price of these acquisitions was allocated to the assets acquired and liabilities assumed, which related primarily to inventory of $15.9 million, property, plant and equipment of $21.3 million, goodwill of $88.4 million, intangible assets such as, customer lists and trademarks, of $73.4 million and $34.3 million, contingent consideration of $16.8 million and noncurrent deferred income tax liabilities of $12.3 million. The goodwill recorded is a result of expected synergies and other benefits that we believe will result from the integration of the acquisitions with our operations. Purchase accounting for these acquisitions was finalized during the second quarter of fiscal 2024.
The MAC Metal acquisition earn-out is payable over two consecutive twelve-month periods, with the first period starting in the month following the close of the applicable acquisition and payments are based upon achieving certain adjusted EBITDA-based metrics, as defined in the purchase agreement. There was an increase of $5.0 million in contingent consideration during the nine months ended September 28, 2024 to $21.8 million, of which $9.6 million is recognized in other current liabilities and $12.3 million is recognized in other long-term liabilities on our Condensed Consolidated Balance Sheets at September 28, 2024.
Note 4 - Inventories
The following table sets forth the components of inventories:
September 28,
2024 		December 31,
2023
Raw materials $ 379,979 $ 291,093
Work in process 52,232 59,336
Finished goods 254,377 146,410
Total inventories $ 686,588 $ 496,839
Note 5 - Goodwill and Intangible Assets
The following table sets forth the changes in the carrying amount of goodwill by reportable segment and the accumulated impact of impairment loss:
Aperture
Solutions 		Surface
Solutions 		Shelter
Solutions 		Total
Balance, as of December 31, 2023 (1)
$ 771,133 $ 708,423 $ 202,208 $ 1,681,764
Impact of acquisitions and related measurement period adjustments (2)
170,762 1,686 137,421 309,869
Impairment (12,896) (369,903) - (382,799)
Currency translation (360) (1,345) - (1,705)
Other(3)
5,504 586 6,429 12,519
Balance, September 28, 2024 $ 934,143 $ 339,447 $ 346,058 $ 1,619,648
Balance,
Goodwill
$ 947,039 $ 709,350 $ 346,058 $ 2,002,447
Accumulated impairment loss
(12,896) (369,903) - (382,799)
Balance, September 28, 2024 $ 934,143 $ 339,447 $ 346,058 $ 1,619,648
(1) There were no impairment losses prior to the period ended December 31, 2023.
(2) Measurement period adjustments have been recorded in conjunction with the acquisitions of MAC Metal, EAS and Harvey during the period. See Note 3- Acquisitions for additional information.
(3) Other includes insignificant out-of-period corrections totaling $12.5 million, which related to matters that existed as of the date of the Merger.
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Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. The Company evaluates goodwill for impairment at least annually as of November 1 or whenever events occur, or circumstances indicate, that it is more likely than not that the fair value of a reporting unit is below its carrying value. The process for evaluating potential impairment of goodwill is subjective and requires significant judgement. In estimating the fair value of reporting unit for the purposes of our annual or periodic impairment analyses, we make estimates or significant judgements about the future cash flows of the reporting unit. Our cash flow forecasts are based on assumptions that represent what we believe to be the highest and best use for our reporting units. Changes in judgement on these assumptions and estimates could result in goodwill impairment charges. We believe that the assumptions and estimates utilized are appropriate based upon the information available to management.
We have six reporting units defined as "Aperture Solutions-U.S.," "Aperture Solutions-Canada," "Surface Solutions-U.S.," "Surface Solutions-Canada," "Stone" and "Shelter Solutions." Aperture Solutions-U.S. and Aperture Solutions-Canada reporting units are part of the Aperture Solutions reportable segment. Surface Solutions-U.S., Surface Solutions-Canada and Stone are part of the Surface Solutions reportable segment. Shelter Solutions is a reporting unit and a reportable segment.
During August 2024, we evaluated goodwill and other long-lived assets for impairment at the reporting unit level, due to the events described below, which indicated the carrying amounts of goodwill within the Aperture Solutions and Surface Solutions reportable segments and intangible assets in the Surface Solutions reportable segment were in excess of their estimated fair values.
Aperture Solutions-U.S., Siding Solutions-U.S. and Stone experienced adverse impacts as a result of changes in market conditions and continued high-interest rates, relative to recent historical values, which contributed to reduced forecasted revenues and reduced projected future cash flows.
As a result of these adverse impacts, the Company performed a quantitative assessment of goodwill impairment by comparing the fair value of these reporting units to their respective carrying amounts. When performing the assessment the Company determined the fair value of its reporting units as described below. The Company determined that the carrying amount of goodwill for its Aperture Solutions-U.S., Siding Solutions-U.S., and Stone reporting units were impaired during the three months ended September 28, 2024. As a result the Company recorded the following impairment charges: $12.9 million related to Aperture Solutions-U.S., $329.1 million related to Siding Solutions-U.S. and $40.8 million related to Stone. After recording these impairment charges, there is no goodwill remaining at Stone. No goodwill impairment charges were recorded prior to or during 2023.
If these or our other reporting units are unable to achieve their current financial forecasts, we may be required to record an impairment charge in a future period related to goodwill.
The Company uses a quantitative approach to measure the fair value of its reporting units by equally weighting the discounted cash flow approach, which is a Level 3 measurement, and the market approach, which is a Level 2 measurement. The market approach estimates fair value through recent sales of comparable assets or business entities. The discounted cash flow analysis requires significant judgements, including estimates of future cash flows, which are dependent on internal forecasts and determination of the Company's weighted average cost of capital. The weighted average cost of capital used for all reporting units in the Company's analysis was 12.0%.
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Intangible Assets, Net
The following table sets forth the major components of intangible assets:
Range of Life
in Years 		Weighted Average Amortization Remaining Years Carrying Value Accumulated Amortization Net Carrying Value
As of September 28, 2024:
Customer lists and relationships 3 - 19 16 $ 2,103,055 $ (312,449) $ 1,790,606
Trademarks, trade names and other 11 - 15 13 728,931 (89,073) 639,858
Total intangible assets $ 2,831,986 $ (401,522) $ 2,430,464
Range of Life
in Years 		Weighted Average Amortization Remaining Years Carrying Value Accumulated Amortization Net Carrying Value
As of December 31, 2023:
Customer lists and relationships 3 - 19 16 $ 1,883,757 $ (192,473) $ 1,691,284
Trademarks, trade names and other 15 14 653,992 (59,208) 594,784
Total intangible assets $ 2,537,749 $ (251,681) $ 2,286,068
During August 2024, the Company recorded an impairment charge to the intangible assets within the Stone reporting unit. The Company's forecasted cash flows of Stone indicated the carrying value of the intangible assets were not recoverable and therefore the Company recorded an impairment charge of $32.7 million during the three months ended September 28, 2024. After recording this impairment charge, no intangible assets remain at Stone. No impairments were recorded prior to or during 2023.
Intangible assets are amortized on a straight-line basis. The following table sets forth the amortization expense related to intangible assets:
Three Months Ended Nine Months Ended
September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Amortization expense $ 55,185 $ 44,690 $ 151,384 $ 126,292
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Note 6 - Product Warranties
The following table sets forth the changes in the carrying amount of product warranties liability:
Nine Months Ended
September 28, 2024 September 30, 2023
Balance, beginning of period $ 194,237 $ 202,463
Warranties sold - 1,016
Revenue recognized - (1,843)
Expense 14,345 25,367
Claims and settlements (14,665) (27,982)
Impact of acquisitions 11,998 -
Reclassification of deferred warranty revenue(1)
(24,717) -
Balance, end of period $ 181,198 $ 199,021
Reflected as:
Current liabilities - Rebates, warranties and other customer-related liabilities $ 21,456 $ 34,224
Noncurrent liabilities - Other long-term liabilities 159,742 164,797
Total product warranty liability $ 181,198 $ 199,021
(1) Reclassification of deferred warranty revenue for the Shelter Solutions reportable segment that had historically been included in the warranty liability disclosure. Deferred warranty revenue is recorded in other current liabilities of $2.1 million and other long-term liabilities of $22.7 million within our Condensed Consolidated Balance Sheets for nine months ended September 28, 2024.
Note 7 - Debt
The following table sets forth the components of long-term debt:
September 28, 2024 December 31, 2023
Effective Interest Rate Principal Outstanding
Unamortized Fair Value Adjustment (1)
Unamortized Discount and
Issuance Costs 		Carrying Amount Principal Outstanding
Unamortized Fair Value Adjustment(1)
Unamortized Discount and
Issuance Costs 		Carrying Amount
Term loan facility, due April 2028 8.57 % $ 2,515,500 $ (247,488) $ - $ 2,268,012 $ 2,528,500 $ (292,442) $ - $ 2,236,058
Term loan facility, due August 2028 9.69 % 295,500 - (15,817) 279,683 297,000 - (18,370) 278,630
Term loan facility, due May 2031 10.04 % 500,000 - (4,965) 495,035 - - - -
6.125% senior notes, due January 2029
13.73 % 318,699 (77,013) - 241,686 318,699 (87,050) - 231,649
8.750% senior secured notes, due August 2028
10.61 % 710,000 - (38,327) 671,673 710,000 - (44,787) 665,213
9.500% senior secured notes, due August 2029
9.94 % 500,000 - (6,943) 493,057 - - - -
Total long-term debt $ 4,839,699 $ (324,501) $ (66,052) $ 4,449,146 $ 3,854,199 $ (379,492) $ (63,157) $ 3,411,550
Reflected as:
Current liabilities - Current portion of long-term debt $ 34,000 $ 29,000
Non-current liabilities - Long-term debt 4,415,146 3,382,550
Total long-term debt $ 4,449,146 $ 3,411,550
Fair value - Senior notes - Level 1 $ 1,507,131 $ 988,702
Fair value - Term loans - Level 2 3,258,241 2,835,596
Total fair value $ 4,765,372 $ 3,824,298
(1) In July 2022, as a result of the pushdown accounting related to the Merger, the carrying values of the term loan facility due April 2028 and the 6.125% senior notes were adjusted to fair value.
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Issuance of 9.500% Senior Secured Notes due August 2029
On August 7, 2024, the Company issued $500.0 million in aggregate principal amount of 9.500% Senior Secured Notes ("9.500% Senior Secured Notes") due August 2029. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2025.
The 9.500% Senior Secured Notes are secured senior indebtedness and rank equal in right of payment with all existing and future senior indebtedness of the Company, and are senior in right of payment to all existing and future subordinated indebtedness of the Company.
The Company may redeem the 9.500% Senior Secured Notes in whole or in part, subject to certain prepayment premiums if the 9.500% Senior Secured Notes were to be redeemed prior to August 15, 2028.
Fifth Amendment to the Cash Flow Credit Agreement
On May 15, 2024, the Company entered into a Fifth Amendment to the Cash Flow Credit Agreement, dated as of April 12, 2018, to incur a new incremental term loan facility (the "Term Loan Facility, due May 2031") in the aggregate principal amount of $500.0 million, maturing on May 15, 2031. The Term Loan Facility, due May 2031, amortizes in nominal quarterly installments equal to one percent of the aggregate initial principal amount thereof per annum, with the remaining balance payable upon maturity.
The Term Loan Facility, due May 2031 bears annual interest at a floating rate measured by reference to, at the Company's option, either (i) a Term SOFR rate (subject to a floor of 0.50%) plus an applicable margin of 4.50% per annum or (ii) an alternate base rate plus an applicable margin of 3.50% per annum.
The Term Loan Facility, due May 2031 and previous borrowings under the Cash Flow Credit Agreement may be prepaid at the Company's option at any time, subject to minimum principal amount requirements. Prepayments of the Term Loan Facility, due May 2031 in connection with a repricing transaction on or prior to November 15, 2024, are subject to a 1.00% prepayment premium. Prepayments may otherwise be made without premium or penalty (other than customary breakage costs). The 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.
Repurchase of 6.125% Senior Notes due January 2029
The Company repurchased an aggregate principal amount of $- million and $46.8 million of its 6.125% Senior Notes for $- million and $33.9 million in cash during the three and nine months ended September 30, 2023. The repurchases, which resulted in a write-off of associated unamortized debt discount and deferred financing costs, resulted in a loss of $0.2 million for the nine months ended September 30, 2023. There were no repurchases of the Company's 6.125% Senior Notes during 2024.
Short-Term Borrowings
The following table sets forth the Company's availability under its revolving credit facilities:
September 28, 2024 December 31, 2023
Authorized Borrowings Letters of Credit and Priority Payables Authorized Borrowings Letters of Credit and Priority Payables
Asset-based lending facility, due May 2029(1)
$ 850,000 $ 65,000 $ 56,000 $ 850,000 $ - $ 47,000
Cash flow revolver(2)
92,000 45,000 - 92,000 - -
First-in-last-out tranche asset-based lending facility, due May 2029(1)
95,000 95,000 - 95,000 - -
Total $ 1,037,000 $ 205,000 $ 56,000 $ 1,037,000 $ - $ 47,000
(1) As of September 28, 2024, borrowings on revolving credit facilities are included within short-term borrowings and classified as a current liability on the Condensed Consolidated Balance Sheets.
(2) Cash flow revolver commitment of $92.0 million will mature in May 2029.
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Eighth Amendment to the ABL Credit Agreement
On May 15, 2024, the Company entered into Amendment No. 8 to the ABL Credit Agreement ("Amendment No. 8"), which amended the ABL Credit Agreement in order to terminate the existing revolving commitments of each of the Extending Revolving Credit Lenders originally maturing on July 25, 2027 (the "Existing ABL Commitments"), and replace such Existing ABL Commitments with an extended revolving commitment of $945.0 million maturing on May 15, 2029, subject to the outstanding aggregate principal amount. As of May 15, 2024, following consummation of Amendment No. 8, there were $55.0 million of revolving loans drawn and $43.3 million of letters of credit issued under the ABL Facility.
Borrowing availability under the 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 ABL Credit Agreement. Availability is reduced by issuance of letters of credit as well as any borrowings.
Loans outstanding under the ABL Facility bear interest at a floating rate measured by reference to, at the Company's option, either (i) a Term SOFR rate (subject to a SOFR floor of 0.00%) plus an applicable margin ranging from 1.25% to 1.75% per annum depending on the average daily excess availability under the ABL Facility or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 0.75% per annum depending on the average daily excess availability under the ABL Facility. Additionally, unused commitments under the ABL Facility are subject to a 0.25% per annum fee.
Covenant Compliance
The ABL Credit Agreement includes a minimum fixed charge coverage ratio of 1.00:1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the ABL Facility and continuing until such time as specified availability has been in excess of such threshold for a period of 20 consecutive calendar days. The Cash Flow Credit Agreement includes a financial covenant set at a maximum secured leverage ratio of 7.75:1.00, which will apply if the outstanding amount of loans and drawings under letters of credit which have not then been reimbursed exceeds a specified threshold at the end of any fiscal quarter.
The Company's debt agreements contain a number of covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness; make dividends and other restricted payments; incur additional liens; consolidate, merge, sell or otherwise dispose of all or substantially all assets; make investments; transfer or sell assets; enter into restrictive agreements; change the nature of the business; and enter into certain transactions with affiliates. The Company is in compliance with all of its covenants as of September 28, 2024.
Interest Rate Swaps
The Company uses certain interest rate swaps to manage a portion of the interest rate risk on its term loans. The following table sets forth the terms of the Company's interest rate swap agreements:
Notional amount $ 1,500,000
Forecasted term loan interest payments being hedged 1-month SOFR
Fixed rate paid 2.0038%
Origination date April 17, 2023
Maturity date April 15, 2026
Fair value at September 28, 2024 - Other assets, net
$ 33,523
Fair value at December 31, 2023 - Other assets, net $ 64,704
Level in fair value hierarchy(1)
Level 2
(1)Interest rate swaps are based on cash flow hedge contracts that have fixed rate structures and are measured against market based SOFR yield curves. These interest rate swaps are classified within Level 2 of the fair value hierarchy because they are valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.
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Note 8 - Accumulated Other Comprehensive Income
The following tables set forth the change in accumulated other comprehensive income attributable to the Company by each component of accumulated other comprehensive income, net of applicable income taxes:
Foreign Currency Translation Adjustments Derivative Instruments Unrecognized Gain on Retirement Benefits
Total Accumulated Other Comprehensive Income (Loss)
Balance, June 29, 2024 $ (11,823) $ 32,894 $ 820 $ 21,891
Activity 1,221 (23,381) - (22,160)
Balance, September 28, 2024 $ (10,602) $ 9,513 $ 820 $ (269)
Balance, July 1, 2023 $ (7,269) $ 44,924 $ 336 $ 37,991
Activity (6,059) (373) - (6,432)
Balance, September 30, 2023 $ (13,328) $ 44,551 $ 336 $ 31,559
Foreign Currency Translation Adjustments Derivative Instruments Unrecognized Gain on Retirement Benefits
Total Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2023 $ (9,553) $ 26,600 $ 820 $ 17,867
Activity (1,049) (17,087) - (18,136)
Balance, September 28, 2024 $ (10,602) $ 9,513 $ 820 $ (269)
Balance, December 31, 2022 $ (6,789) $ 40,962 $ 336 $ 34,509
Activity (6,539) 3,589 - (2,950)
Balance, September 30, 2023 $ (13,328) $ 44,551 $ 336 $ 31,559
Note 9 - Share-Based Compensation
Pre-Merger Awards
In connection with the Merger in July 2022, under which Cornerstone Building Brands became a privately held company, unvested share-based compensation awards that were previously granted to key employees and executives were cancelled and converted into a contingent contractual right to receive a cash payment from the Company upon vesting. The Company had $27.6 million at December 31, 2023 and $0.7 million at September 28, 2024 classified as a current liability within employee-related liabilities on its Condensed Consolidated Balance Sheets. The Company paid out $24.7 million of cash to settle Pre-Merger Awards in March 2024.
The Company recognized a gain of $2.2 million in the three months ended September 28, 2024 and an expense of $2.6 million in the three months ended September 30, 2023. The Company recognized an expense of $1.1 million in the nine months ended September 28, 2024 and $1.1 million in the nine months ended September 30, 2023. These amounts are included in selling, general and administrative expense on the Condensed Consolidated Statements of Loss.
Incentive Unit Awards
Beginning in the fourth quarter of 2022, pursuant to an incentive unit grant agreement, certain participants were granted incentive units in Camelot Return Ultimate, LP (the "Partnership"). The incentive units provide the holder with the opportunity to receive, upon certain vesting events and subject to Partnership repurchase rights and conditions, a return based upon the appreciation of the Partnership's equity value from the date of grant. The incentive units vest over a five-year period on a straight-line basis. For the nine months ended September 28, 2024, 45,036 incentive units were granted at an average grant date fair value of $44.59 per incentive unit. The Company recognized an expense from incentive units of $1.7 million in the three months ended September 28, 2024, and $1.9 million for the three months ended September 30, 2023. The Company recognized expense from incentive units of $4.5 million for the nine months ended September 28, 2024, and $6.9 million for the nine months ended September 30, 2023. The Company estimates that the unrecognized expense is expected to be recognized over a weighted-average period of 3.3 years totaling $24.6 million.
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Note 10 - Equity Transactions - Dividend
In January 2024, the Company paid a dividend on our common stock in the aggregate amount of $231.6 million, which was received by our direct parent Camelot Return Intermediate Holdings, LLC, ("Camelot Parent"), and further distributed to Camelot Return Parent, LLC ("Camelot Return Parent"), an indirect parent of the Company. Camelot Return Parent used the funds received to redeem all 1,950,000 preferred units of Camelot Return Parent held by CD&R Pisces Holdings, L.P.
Note 11 - Income Taxes
The Company's effective tax rate includes state income taxes, foreign tax rate differentials and changes in the valuation allowance. The following table sets forth the effective tax rate for the three and nine months ended September 28, 2024 and September 30, 2023:
Three Months Ended Nine Months Ended
September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Effective tax rate 7.7 % 24.5 % 8.5 % 27.6 %
The Company's effective tax rate varied from the statutory tax rate primarily due to state income taxes, foreign tax rate differentials and changes in the valuation allowance. The change in the effective tax rate for the three and nine month periods ended September 28, 2024 compared to the three and nine month periods ended September 30, 2023 is primarily due to pre-tax book losses resulting from impairment charges to deductible and non-deductible goodwill and intangible assets in addition to increased book amortization and depreciation related to the Merger transaction.
Note 12 - Reportable Segment and Geographical Information
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the CODM for purposes of allocating resources and evaluating financial performance. Our CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about our five operating segments, for the purposes of allocating resources and evaluating financial performance. The Company is organized into three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions, which operate principally in the U.S. with limited operations in Canada and Mexico.
•The Aperture Solutions reportable segment offers a broad line of windows and doors at multiple price-points for residential new construction and repair and remodel end markets in the U.S. and Canada. Its main products include vinyl, aluminum, wood-composite and aluminum clad-wood windows and patio doors, as well as steel, wood-composite and fiberglass entry doors.
•The Surface Solutions reportable segment offers a broad suite of surface solutions products and accessories at multiple price-points for the residential new construction and repair and remodel end markets as well as stone installation services. Its main products include vinyl siding and accessories, cellular polyvinyl chloride trim, vinyl fencing and railing, stone veneer and gutter protection products.
•The Shelter Solutions reportable segment designs, engineers, manufactures and distributes extensive lines of metal products, including metal roofing, for the low-rise commercial construction market under multiple brand names and through a nationwide network of manufacturing plants and distribution centers. The Company defines low-rise commercial construction as building applications of up to five stories.
Management monitors the operational results of its reportable segments separately for purposes of making decisions about resources and evaluating performance. Management evaluates performance on the basis of segment earnings before interest, income taxes, depreciation and amortization ("Adjusted reportable segment EBITDA").
Corporate operating expenses are not allocated to reportable segments. Corporate and Other consists specifically of corporate operating expenses that are generally not allocated to reportable segments, related-party management fees and other items that are not assigned or allocated to reportable segments. Any intercompany revenues or expenses are eliminated in consolidation.
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The following table sets forth net sales, Adjusted reportable segment EBITDA and a reconciliation to income (loss) before income taxes:
Three Months Ended Nine Months Ended
September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales:
Aperture Solutions $ 674,398 $ 637,669 $ 1,877,248 $ 1,889,913
Surface Solutions 349,907 357,400 960,299 961,513
Shelter Solutions 407,051 429,689 1,103,798 1,280,638
Total net sales $ 1,431,356 $ 1,424,758 $ 3,941,345 $ 4,132,064
Adjusted reportable segment EBITDA:
Aperture Solutions $ 83,044 $ 91,946 $ 227,548 $ 260,032
Surface Solutions 77,421 79,205 195,096 167,011
Shelter Solutions 17,943 79,002 128,741 268,386
Total adjusted reportable segment EBITDA 178,408 250,153 551,385 695,429
Corporate and Other (469,541) (62,534) (586,850) (165,095)
Depreciation and amortization (103,586) (93,253) (296,441) (331,077)
Interest expense (124,120) (91,013) (325,687) (277,438)
Foreign exchange gain (loss) 782 (3,753) (6,004) 2,694
Loss on extinguishment of debt - - - (184)
Other income, net 994 4,027 4,550 8,832
Income (loss) before income taxes $ (517,063) $ 3,627 $ (659,047) $ (66,839)
The following table sets forth net sales disaggregated by reportable segment:
Three Months Ended Nine Months Ended
September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Aperture Solutions - Principally vinyl windows $ 674,398 $ 637,669 $ 1,877,248 $ 1,889,913
Surface Solutions:
Vinyl siding 169,586 176,957 470,209 471,983
Metal siding 100,529 95,348 268,465 241,851
Injection molded siding 15,953 16,561 42,980 44,603
Stone 19,004 19,098 51,640 56,567
Stone veneer installation and other 44,835 49,436 127,005 146,509
Total 349,907 357,400 960,299 961,513
Shelter Solutions - Metal building products 407,051 429,689 1,103,798 1,280,638
Total net sales $ 1,431,356 $ 1,424,758 $ 3,941,345 $ 4,132,064
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The following table sets forth total assets disaggregated by reportable segment:
September 28,
2024 		December 31,
2023
Aperture Solutions $ 3,577,966 $ 2,934,102
Surface Solutions 1,881,652 2,268,443
Shelter Solutions 1,687,657 1,111,679
Corporate 292,112 619,117
Total assets $ 7,439,387 $ 6,933,341
Note 13 - Commitments and Contingencies
As a manufacturer of products primarily for use in building construction, the Company is inherently exposed to various types of contingent claims, both asserted and unasserted, in the ordinary course of business. As a result, from time to time, the Company may become involved in various legal proceedings or other contingent matters arising from claims or potential claims arising out of its operations and businesses that cover a wide range of matters, including, among others, environmental, contract, employment, including applicable benefit and pension plans, intellectual property, securities, personal injury, property damage, product liability, warranty and modification, adjustment or replacement of component parts or units sold, which may include product recalls. The Company insures (or self-insures) against these risks to the extent deemed prudent by its management and to the extent insurance is available. Management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company's results of operations, financial position or cash flows. However, such matters are subject to many uncertainties and outcomes and are not predictable with assurance.
Environmental
The Company's operations are subject to various federal, state, local and foreign environmental, health and safety laws. Among other things, these laws regulate the emissions or discharge of contaminants into the environment; govern the use, storage, treatment, disposal and management of hazardous substances and wastes; protect employee health and safety, public health and welfare and the end-users of its products; regulate the chemicals used in its products; and impose liability for the costs of investigating and remediating (as well as other damages resulting from) present and past releases of hazardous substances. Violations of these laws or of any conditions contained in environmental permits could impact the Company's current and future operations.
The Company believes it is in material compliance with all applicable laws and regulations and has recorded a liability of $4.0 million as of September 28, 2024 and $8.8 million as of December 31, 2023 for certain subsurface investigation and remedial matters.
Litigation
The Company is a party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. The Company is also included in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines or penalties and other costs in substantial amounts and are described below.
Stockholder Litigation
In July 2022, and pursuant to an Agreement and Plan of Merger dated March 5, 2022, Clayton, Dubilier and Rice, LLC ("CD&R") became the indirect owner of Cornerstone Building Brands. In January 2023, purported former stockholders filed two separate complaints challenging the fairness of the Merger. The complaints are captioned Firefighters' Pension System of the City of Kansas City, Missouri Trust and Gary D. Voigt v. Affeldt et al., C.A. No. 2023-0091-JTL (Del. Ch.) and Whitebark Value Partners LP and Robert Garfield v. Clayton Dubilier & Rice, LLC et al., C.A. No. 2023-0092-JTL (Del. Ch.). In both complaints, the plaintiffs allege that CD&R and its affiliates controlled the Company prior to the transaction and that certain directors and officers of the Company, as well as CD&R and its affiliates, breached their fiduciary duties and engaged in conduct resulting in a sale of the Cornerstone Building Brands public stockholders' shares to CD&R at an unfair price. The plaintiffs seek unspecified monetary damages, attorneys' fees, expenses and costs. The court consolidated the two cases, and on May 3, 2023, selected Whitebark Value Partners LP as lead plaintiff. On July 14, 2023, the defendants moved to dismiss the operative complaint. The motion to dismiss was denied on January 10, 2024, and the case is ongoing. On June 26, 2024, the plaintiffs filed an amended complaint. The Company intends to vigorously defend against these claims. The Company cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss.
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In June 2023, a purported former stockholder filed a class action complaint in the United States District Court for the District of Delaware alleging that the Company's disclosures issued in connection with the Merger were materially misleading in violation of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934. The complaint is captioned Water Island Merger Arbitrage Institutional Commingled Master Fund, L.P. v. Cornerstone Building Brands et al., Case No. 1:23-cv-00701 (D. Del.). The complaint alleges that the Company's directors and officers issued misleading disclosures, which caused stockholders to approve the Merger at an unfair price. The plaintiff seeks unspecified monetary damages, interest, attorneys' fees, expenses, and costs. On December 8, 2023, the defendants moved to dismiss the operative complaint, and, in the alternative, to stay the litigation. On September 30, 2024, the court granted the defendants' motion to dismiss without prejudice. On October 15, 2024, the plaintiffs filed a second amended complaint. The Company intends to vigorously defend against these claims. The Company cannot predict with any degree of certainty the outcome of this matter or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. The Company does not believe, based on currently available information, that the outcome of these proceedings will have a material adverse effect on its financial condition.
Note 14 - Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information:
Nine Months Ended
September 28, 2024 September 30, 2023
Interest paid $ 264,879 $ 235,065
Income taxes paid $ 88,150 $ 33,523
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CORNERSTONE BUILDING BRANDS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following is management's discussion and analysis of certain significant factors that have affected our consolidated financial condition and results of operations during the periods presented (the "MD&A"). This information should be read in conjunction with the Condensed Consolidated Financial Statements included herein "Item 1. Condensed Consolidated Financial Statements" and the Condensed Consolidated Financial Statements and the Notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the "2023 Form 10-K").
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. In some cases, our forward-looking statements can be identified by the words "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "may," "objective," "plan," "potential," "predict," "projection," "should," "will," "target" or other similar words. We have based our forward-looking statements on our management's beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these expectations and the related statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected. These risks, uncertainties and other factors include, but are not limited to:
•Challenging macroeconomic conditions affecting the residential and commercial construction industry and markets, including increasing interest rates and demand in new construction and repair and remodeling;
•Commodity price volatility or limited availability of raw materials, including steel, polyvinyl chloride ("PVC") resin, aluminum and glass due to supply chain disruptions;
•Increases in the macroeconomic inflationary environment and our ability to react accordingly;
•Our ability to identify and develop relationships with a sufficient number of qualified suppliers to mitigate risk in the event a significant supplier experiences a significant production or supply chain interruption;
•Seasonality of the business and adverse weather conditions;
•The increasing difficulty of consumers and builders in obtaining credit or financing;
•Our ability to successfully implement operational efficiency initiatives, including to increase automation and mitigate increases in our manufacturing costs;
•Our ability to successfully achieve price increases to offset cost increases;
•Ability to compete effectively against competitors;
•Our ability to successfully integrate our acquired businesses and to realize anticipated benefits;
•Our ability to employ, train and retain qualified personnel;
•Increases in labor costs, labor market pressures, potential labor disputes, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;
•Increases in energy costs;
•Increases in freight and transportation costs;
•Volatility in the United States ("U.S.") and international economies and in the credit markets;
•An impairment of our goodwill or intangible assets;
•Our ability to successfully develop new products or improve existing products;
•Enforcement and obsolescence of our intellectual property rights;
•Costs related to compliance with, violations of or liabilities under environmental, health and safety laws;
•Our ability to make strategic acquisitions accretive to earnings and dispositions at favorable prices and terms;
•Our ability to fund operations, provide increased working capital necessary to support our strategy and acquisitions using available liquidity;
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•Global climate change and compliance with new or changed laws or regulations relating to environmental, social and governance;
•Breaches of our information system security measures;
•Damage to our computer infrastructure and software systems, as well as issues relating to the incorporation of artificial intelligence solutions into our systems;
•Implementation of and necessary maintenance or replacements to our enterprise resource planning technologies;
•Potential personal injury, property damage or product liability claims or other types of litigation, including stockholder litigation related to the Merger;
•Compliance with certain laws related to our international business operations;
•Significant changes in factors and assumptions used to measure certain of our defined benefit plan obligations and the effect of actual investment returns on pension assets;
•Additional costs from new regulations which relate to the utilization or manufacturing of our products or services, including changes in building codes and standards;
•Increases in tariffs or import and trade restrictions;
•Our ability to maintain effective internal control over financial reporting and remediate our identified material weakness;
•Our controlling stockholder's interests differing from the interests of holders of our indebtedness;
•Our substantial indebtedness and our ability to incur substantially more indebtedness;
•Limitations that our debt agreements place on our ability to engage in certain business and financial transactions;
•Our ability to obtain financing on acceptable terms;
•Exchange rate fluctuations;
•Downgrades of our credit ratings;
•The effect of increased interest rates on our ability to service our debt; and
•Other risks detailed under the caption "Risk Factors" in this Quarterly Report on Form 10-Q and in Part I, Item 1A in the 2023 Form 10-K and other filings we make with the Securities Exchange Commission.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, we caution you that assumed facts or bases almost always vary from actual results and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report, including those described under the caption "Risk Factors" in Item 1A in this Quarterly Report on Form 10-Q and in Part I, Item 1A in the 2023 Form 10-K and other filings we make with the Securities and Exchange Commission. We expressly disclaim any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in our expectations unless the securities laws require us to do so.
Company Overview
Our Company
Cornerstone Building Brands, Inc. ("Cornerstone Building Brands", together with its subsidiaries, unless the context requires otherwise, the "Company," "we," "us" or "our") is a holding company incorporated in Delaware. We are a leading manufacturer of exterior building products in North America by sales and serve residential and commercial customers across both the new construction and repair and remodel markets.
Our operations are organized as three reportable segments: Aperture Solutions, Surface Solutions and Shelter Solutions. We have:
•One of the broadest product offerings in our industry. Our total addressable market is diverse and expands across multiple geographies, end markets, channels and customers providing us with significant benefits.
•A leading market position in various North American markets we serve, including, among others, vinyl windows, vinyl siding, stone veneer installations, metal accessories, metal roofing and wall systems and engineered metal building systems.
•An extensive coast-to-coast network of manufacturing, distribution and branch office facilities throughout North America.
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•A vertically integrated manufacturing process that enables us to deliver better service and positions us to be a cost-advantaged manufacturer.
We are mindful of the harmful effects of global climate change and the contributions to climate change from manufacturing operations and the end-use of building construction products. We have made and continue to make progress on our work related to sustainability matters.
Results of Operations
The following table represents key results of operations on a consolidated basis for the interim periods indicated and the changes between periods:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales $ 1,431,356 $ 1,424,758 $ 3,941,345 $ 4,132,064
Gross profit 276,562 333,067 827,249 912,765
% of net sales 19.3 % 23.4 % 21.0 % 22.1 %
Selling, general and administrative expenses 671,281 228,621 1,159,155 703,428
% of net sales 46.9% 16.0% 29.4% 17.0%
Loss on divestiture - 10,080 - 10,080
Income (loss) from operations (394,719) 94,366 (331,906) 199,257
% of net sales (27.6) % 6.6% (8.4) % 4.8 %
Interest expense (124,120) (91,013) (325,687) (277,438)
Foreign exchange gain (loss) 782 (3,753) (6,004) 2,694
Loss on extinguishment of debt - - - (184)
Other income, net 994 4,027 4,550 8,832
Income (loss) before income taxes (517,063) 3,627 (659,047) (66,839)
Income tax expense (benefit) (40,029) 890 (56,219) (18,435)
Net income (loss) $ (477,034) $ 2,737 $ (602,828) $ (48,404)
Non-GAAP financial measure - Adjusted EBITDA* $ 147,049 $ 216,735 $ 451,847 $ 596,437
% of net sales 10.3 % 15.2 % 11.5 % 14.4 %
* Refer to Non-GAAP Financial Measures for further discussion.
Net sales increased $6.6 million, or 0.5%, for the three months ended September 28, 2024, compared to the comparable prior year period, and decreased $190.7 million, or 4.6%, for the nine months ended September 28, 2024, compared to the comparable prior year period, mainly due to lower volume across all reportable segments, partially offset by the strategic acquisitions of M.A.C. Métal Architectural Inc. ("MAC Metal") in August 2023, Eastern Architectural Systems ("EAS") in December 2023, Harvey Building Products Corp. ("Harvey") in April 2024 and Mueller Supply Company, Inc. ("Mueller") in July 2024.
Gross profit as a percentage of net sales was 19.3% for the three months ended September 28, 2024, compared to 23.4% for the comparable prior year period, and 21.0% for the nine months ended September 28, 2024 compared to 22.1% for the comparable prior year period. The decrease was driven by higher material costs, lower volumes, and unfavorable price over inflation, partially offset by manufacturing net efficiencies.
Selling, general and administrative expenses increased $442.7 million, for the three months ended September 28, 2024 compared to the comparable prior year period, and increased $455.7 million for the nine months ended September 28, 2024 compared to the comparable prior year period. The Company recognized impairment charges for goodwill of $382.8 million and for intangibles of $32.7 million during the three months ended September 28, 2024. Additionally, the Company incurred higher employee compensation expenses and higher depreciation and amortization mainly due to the impact of the Harvey and Mueller acquisitions in 2024.
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Interest expenseincreased $33.1 million for the three months ended September 28, 2024, compared to the comparable prior year period and increased $48.2 million for the nine months ended September 28, 2024 compared to the comparable prior year period. The following table sets forth the components of interest expense:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Interest on outstanding borrowings $ 109,861 $ 85,772 $ 288,959 $ 246,933
Cash impact of interest rate swaps (12,619) (12,350) (38,630) (32,345)
Amortization of interest rate swap fair value(1)
2,995 (2,995) 8,985 2,995
Amortization of debt discount, debt issuance costs and purchase accounting fair value adjustment(1)
23,265 20,242 65,644 59,207
Other 618 344 729 648
Total interest expense $ 124,120 $ 91,013 $ 325,687 $ 277,438
(1)The fair value adjustments were made in connection with the Merger in July 2022.
Foreign exchange gain (loss) was$0.8 million and $(6.0) million of gains and losses for the three and nine month periods ended September 28, 2024 compared to $(3.8) million and $2.7 million of losses and gains and for the three and nine months ended September 30, 2023. The changes period over period are attributable to foreign exchange rate changes on intercompany loans based in Canadian currency.
Loss on extinguishment of debtincluded losses of $- and $0.2 million for the three months and nine months ended September 30, 2023, which resulted from the repurchase of our 6.125% Senior Notes due January 2029 ("the 6.125% Senior Notes"). No repurchases were made during the three and nine months ended September 28, 2024.
Other income, net, decreased $3.0 million for the three months ended September 28, 2024, compared to the comparable prior year period, and decreased $4.3 million for the nine months ended September 28, 2024 compared to the comparable prior year period. These decreases are mainly due to less interest income earned on our cash and cash equivalents year over year.
Income tax expense (benefit) was $(40.0) million for the three-month period ended September 28, 2024, $0.9 million for the three-month period ended September 30, 2023; and was $(56.2) million for the nine-month period ended September 28, 2024, and $(18.4) million for the nine-month period ended September 30, 3023. The change was mainly due to pre-tax book losses resulting from impairment charges to deductible and non-deductible goodwill and intangible assets during the three months ended September 28, 2024 and additional book amortization and depreciation related to the Merger transaction in addition to the impact of state income tax as a result of internal restructuring during the three and nine months ended September 28, 2024.
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Reportable Segment Results of Operations
The following table sets forth the continuing results of operations for our reportable segments:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales:
Aperture Solutions $ 674,398 $ 637,669 $ 1,877,248 $ 1,889,913
Surface Solutions 349,907 357,400 960,299 961,513
Shelter Solutions 407,051 429,689 1,103,798 1,280,638
Total net sales $ 1,431,356 $ 1,424,758 $ 3,941,345 $ 4,132,064
Adjusted reportable segment EBITDA:
Aperture Solutions $ 83,044 $ 91,946 $ 227,548 $ 260,032
Surface Solutions 77,421 79,205 195,096 167,011
Shelter Solutions 17,943 79,002 128,741 268,386
Corporate and Other (469,541) (62,534) (586,850) (165,095)
Depreciation and amortization (103,586) (93,253) (296,441) (331,077)
Income (loss) from operations $ (394,719) $ 94,366 $ (331,906) $ 199,257
Aperture Solutions
The following table sets forth the continuing results of operations for the Aperture Solutions reportable segment:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales $ 674,398 $ 637,669 $ 1,877,248 $ 1,889,913
Adjusted reportable segment EBITDA
$ 83,044 $ 91,946 $ 227,548 $ 260,032
% of net sales 12.3 % 14.4 % 12.1 % 13.8 %
Depreciation and amortization $ 47,829 $ 42,701 $ 134,093 $ 146,633
Net salesfor the three months ended September 28, 2024 increased $36.7 million, or 5.8%, and for the nine months ended September 28, 2024 decreased $12.7 million, or 0.7%, mainly driven by lower volumes, partially offset by the strategic acquisition of EAS in December 2023 and Harvey in April 2024.
Adjusted reportable segment EBITDAfor the three months ended September 28, 2024 decreased $8.9 million and for the nine months ended September 28, 2024 decreased $32.5 million, mainly driven by lower volumes and an unfavorable price and product mix net of inflation, partially offset by manufacturing net efficiencies and the strategic acquisition of EAS in December 2023 and Harvey in April 2024.
Surface Solutions
The following table sets forth the continuing results of operations for the Surface Solutions reportable segment:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales $ 349,907 $ 357,400 $ 960,299 $ 961,513
Adjusted reportable segment EBITDA
$ 77,421 $ 79,205 $ 195,096 $ 167,011
% of net sales 22.1 % 22.2 % 20.3 % 17.4 %
Depreciation and amortization $ 23,785 $ 25,545 $ 75,738 $ 65,284
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Net salesfor the three months ended September 28, 2024 decreased $7.5 million, or 2.1%, and for the nine months ended September 28, 2024 decreased $1.2 million, or 0.1% mainly driven by lower volumes, partially offset by the strategic acquisition of MAC Metal in August 2023.
Adjusted reportable segment EBITDAfor the three months ended September 28, 2024 decreased $1.8 million and for the nine months ended September 28, 2024 increased $28.1 million, mainly due to net manufacturing efficiencies and the strategic acquisition of MAC Metal in August 2023, partially offset by lower volumes and an unfavorable price and product mix net of inflation.
Shelter Solutions
The following table sets forth the continuing results of operations for the Shelter Solutions reportable segment:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net sales $ 407,051 $ 429,689 $ 1,103,798 $ 1,280,638
Adjusted reportable segment EBITDA
$ 17,943 $ 79,002 $ 128,741 $ 268,386
% of net sales 4.4 % 18.4 % 11.7 % 21.0 %
Depreciation and amortization $ 30,941 $ 24,361 $ 84,089 $ 115,044
Net salesfor the three months ended September 28, 2024 decreased $22.6 million, or 5.3%, and for the nine months ended September 28, 2024 decreased $176.8 million, or 13.8% mainly driven by lower volumes and unfavorable product and price mix, partially offset by the acquisition of Mueller in July 2024. Lower average selling prices have negatively impacted net sales and margins on weaker market conditions.
Adjusted reportable segment EBITDAfor the three months ended September 28, 2024 decreased $61.1 million and for the nine months ended September 28, 2024 decreased $139.6 million, mainly due to higher material costs, lower volumes, unfavorable product and price mix net of inflation partially offset by manufacturing net efficiencies and the acquisition of Mueller in July 2024.
Adjusted reportable segment EBITDA for the nine months ended September 28, 2024, was negatively impacted by the timing of unfavorable material costs of approximately $30.0 million. Higher cost coil purchases made in the first half of 2024, were consumed in the nine months ended September 28, 2024 and negatively impacted our results. The majority of the higher cost coil inventory was consumed by September 28, 2024, with remaining quantities expected to be consumed in the fourth quarter of 2024. The Company began purchasing coil inventory at lower unit costs in the second quarter of 2024 with market prices continuing to be favorable into the third quarter of 2024. Our results are expected to benefit from the lower cost, coil purchases in the fourth quarter of 2024 and continuing into the first half of 2025.
Corporate and Other
The following table sets forth Corporate and other:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Corporate costs $ 31,359 $ 33,418 $ 99,538 $ 98,992
Impairment loss on goodwill and intangible assets 415,491 - 415,491 -
Strategic development and acquisition related costs 7,986 3,997 21,292 20,534
Loss on divestiture - 10,080 - 10,080
Acquired inventory step-up amortization 10,769 - 11,949 -
Long-term incentive plan compensation 462 4,696 15,885 8,469
Facility closure charges and employee separation 2,625 7,701 5,382 19,132
Fair value of contingent consideration 3,413 - 4,856 -
Other (2,564) 2,642 12,457 7,888
Total Corporate and Other $ 469,541 $ 62,534 $ 586,850 $ 165,095
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Corporate costs decreased $2.1 million and increased $0.5 million for the three and nine months ended September 28, 2024, mainly due to the timing of employee compensation-related expenses.
Depreciation and Amortization
The following table sets forth depreciation and amortization:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Depreciation:
Cost of sales $ 37,933 $ 40,818 $ 119,945 $ 159,955
Selling, general and administrative expenses 10,468 7,745 25,112 44,830
Total depreciation 48,401 48,563 145,057 204,785
Amortization - Selling, general and administrative expenses
55,185 44,690 151,384 126,292
Total depreciation and amortization $ 103,586 $ 93,253 $ 296,441 $ 331,077
Depreciation and amortization increased $10.3 million for the three months ended September 28, 2024 and decreased $34.6 million for the nine months ended September 28, 2024 mainly due to the acquisitions of Harvey and Mueller during the current year offset by the Company recording a cumulative catch-up adjustment during the prior year which resulted in increases of $65.2 million and $1.3 million to cost of sales and selling, general and administrative expenses to account for the update in fair value of these assets as if the adjustments had been made as of the date of the Merger, as well as shortened useful lives and a higher depreciable base as a result of the Merger.
Liquidity and Capital Resources
Our main liquidity and capital resource needs are payments to service our debt, ongoing operations and working capital requirements, capital expenditures and the cost of acquisitions. Our primary source of liquidity is cash generated from our continuing operations, as well as borrowings under our credit facilities. We believe that funds provided by these sources will be adequate to meet our liquidity and capital resource needs for at least the next 12 months under current operating conditions.
We may from time to time take steps to reduce our debt. These actions may include repurchases or opportunistic refinancing of debt. The amount of debt, if any, that may be repurchased or refinanced will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of such debt and we would continue to reflect the debt as outstanding in our Condensed Consolidated Balance Sheets.
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The following table sets forth our total net liquidity position as of September 28, 2024:
(Amounts in thousands) Amount
Cash and cash equivalents $ 158,295
Revolving credit facilities:
Asset-based lending facility(1)
850,000
Cash flow revolving facility 92,000
First-in-last-out tranche asset-based lending facility 95,000
Total revolving credit facilities 1,037,000
Less:
Debt issued under the facilities 205,000
Letters of credit outstanding and priority payables 56,000
Net credit facility 776,000
Net liquidity $ 934,295
(1) Borrowing availability under the ABL Facilities is determined based on specified percentages of the value of eligible inventory, accounts receivable, less certain allowances and subject to certain other adjustments as set forth in the ABL Credit Agreement. Availability is also reduced by issuance of letters of credit.
Cash Flows
Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023
Cash flows from operating activities
$ (177,562) $ 181,622
Cash flows from investing activities
$ (1,080,565) $ (203,614)
Cash flows from financing activities
$ 946,540 $ (55,635)
Cash Flows From Operating Activities
Net cash from operating activities consists mainly of: (i) cash collections on credit sales to our customers, (ii) purchases of commodity based raw materials, (iii) labor and other employee-related expenditures, (iv) other non-labor costs, such as, among other items, supplies, insurance, advertising and marketing costs, (v) interest paid on our long-term debt and (vi) payments for income taxes.
Net cash from operating activities was $(177.6) million for the nine months ended September 28, 2024, a decrease from the $181.6 million provided by operations in the prior year. Lower volumes, higher core working capital, consisting of accounts receivable, inventories and accounts payables, were offset by the timing of incentive compensation plan payouts and the impact of the acquisitions.
Cash Flows From Investing Activities
Our main uses of cash for investing activities are for payments for property and equipment and acquisitions of businesses.
Net cash from investing activities was $(1,080.6) million for the nine months ended September 28, 2024 compared to $(203.6) million used in investing activities for the nine months ended September 30, 2023. The $877.0 million decrease is mainly driven by higher capital expenditures and the acquisitions of Harvey and Mueller in 2024.
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Cash Flows From Financing Activities
Our main uses of cash for financing activities include activity to repurchase and make payments on our long-term debt and distributions to our direct parent Camelot Return Intermediate Holdings, LLC, ("Camelot Parent"). Our main sources of cash from financing activities include the proceeds from issuances of debt.
Net cash from financing activities was $946.5 million for the nine months ended September 28, 2024 compared to $(55.6) million used in financing activities for the nine months ended September 30, 2023. The increase of $1,002.2 million is mainly driven by $1,200.0 million in additional short-term borrowings and $500.0 million in long-term borrowings through amendments to our ABL Credit Agreement and term loan facility and the issuance of the 9.500% Senior Secured Notes during the nine months ended September 28, 2024. The increase is partially offset by the dividend payment of $231.6 million made to Camelot Parent and $995.0 million in repayments of short-term borrowings.
Contingent Liabilities and Commitments
Leases
We have leases for certain manufacturing, warehouse, distribution locations, offices, vehicles and equipment. As of September 28, 2024 the Company had total future lease payments of $743.2 million, with $81.7 million payable within 12 months.
Debt
We have certain debt instruments outstanding. As of September 28, 2024 the Company had total future payments of $5.0 billion, with $239.0 million payable within 12 months. See Note 7 - Debtin the Notes to the Condensed Consolidated Financial Statements for additional information.
Non-GAAP Financial Measures
We use several measures derived from consolidated financial information, but not presented in our Condensed Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the U.S ("U.S. GAAP"). These measures are considered non-GAAP financial measures. Specifically, in this report, we refer to adjusted EBITDA, which is a non-GAAP financial measure. Our non-GAAP financial measure is not intended to replace the presentation of the comparable measure under U.S. GAAP. However, we believe the presentation of the non-GAAP financial measure, when considered together with the comparable U.S. GAAP financial measure, along with a reconciliation to its respective U.S. GAAP financial measure, assists investors in understanding the factors and trends affecting our underlying business that could not be obtained absent these disclosures. Additionally, we believe that the presentation of our non-GAAP financial measure enables investors to evaluate trends in the business excluding certain items which are not entirely a result of our base operations.
Furthermore, the presentation of this non-GAAP financial measure supplements other metrics we use to internally evaluate our business and facilitates the comparison of past and present operations. The non-GAAP financial measure we use may differ from non-GAAP financial measures used by other companies and other companies may not define non-GAAP financial measures we use in the same way.
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Reconciliation of Net Loss to Adjusted EBITDA
The following table presents the reconciliation of net income (loss) to Adjusted EBITDA:
Three Months Ended Nine Months Ended
(Amounts in thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023
Net income (loss) $ (477,034) $ 2,737 $ (602,828) $ (48,404)
Interest expense 124,120 91,013 325,687 277,438
Foreign exchange (gain) loss (782) 3,753 6,004 (2,694)
Loss on extinguishment of debt - - - 184
Other income, net (994) (4,027) (4,550) (8,832)
Income tax expense (benefit) (40,029) 890 (56,219) (18,435)
Income (loss) from operations (394,719) 94,366 (331,906) 199,257
Depreciation and amortization 103,586 93,253 296,441 331,077
Impairment loss on goodwill and intangible assets 415,491 - 415,491 -
Strategic development and acquisition related costs 7,986 3,997 21,292 20,534
Loss on divestiture - 10,080 - 10,080
Acquired inventory step-up amortization 10,769 - 11,949 -
Long-term incentive plan compensation(1)
462 4,696 15,885 8,469
Facility closure charges and employee separation 2,625 7,701 5,382 19,132
Fair value of contingent consideration 3,413 - 4,856 -
Other (2,564) 2,642 12,457 7,888
Adjusted EBITDA $ 147,049 $ 216,735 $ 451,847 $ 596,437
(1)Reflects expenses related to long-term incentive compensation plans, which includes awards that were granted prior to the Merger ("Pre-Merger Awards") and incentive unit grants that occurred subsequent to the Merger.
See Part I, Item 1, "Condensed Consolidated Financial Statements", Note 12 - Reportable Segment and Geographical Information, included herein, for the reconciliation of adjusted reportable segment EBITDA to loss before income taxes. Adjusted reportable segment EBITDA is the only measure of segment profit used by our chief operating decision maker.
Critical Accounting Estimates
There have been no material changes in our critical accounting policies and estimates during the nine months ended September 28, 2024. Refer to the 2023 Form 10-K for a description of the Company's critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in our exposure to market risk during the nine months ended September 28, 2024. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2023, for a description of the Company's market risks.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that information relating to the Company is accumulated and communicated to management, including our principal officers, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have evaluated the effectiveness of our disclosure controls and procedures as of the period ended September 28, 2024 and have concluded that our disclosure controls and procedures were not effective as of September 28, 2024 due to the material weakness in our internal control over financial reporting as described below.
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Notwithstanding the material weakness in our internal control over financial reporting, management has concluded that the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of an issuer's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that an issuer's receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of an issuer's assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, the application of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that compliance with the policies or procedures may deteriorate.
As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our CEO and CFO, evaluated the effectiveness of our internal control over financial reporting as of September 28, 2024. Management's assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 Framework) ("COSO"). Based on management's assessment, management has concluded that our internal control over financial reporting was not effective as of September 28, 2024 due to the material weakness described below.
Material Weakness
A material weakness is a significant deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
On April 1, 2024, we implemented an enterprise resource planning ("ERP") system in our Shelter Solutions reportable segment. During the quarterly period ended September 28, 2024, we identified a material weakness in our internal control over financial reporting that arose from the ineffective application of the software development life cycle ("SDLC") information technology general control. Specifically, the Company determined that the assigned team members lacked the requisite knowledge and experience to develop functional requirements, configure the system, and complete user acceptance tests sufficient to fully test the ERP system prior to going live.
Management's Plan to Remediate the Material Weakness
Management has evaluated the deficiency described above and is developing a remediation plan designed to strengthen our SDLC processes. The remediation plan requires that: (i) functional business experts are identified, trained, and meet established requirements, (ii) business users have sufficient understanding of the underlying functionality being tested, and (iii) additional levels of review are established throughout the SDLC. The remediation plan is subject to ongoing management review, as well as oversight by the Audit Committee of our Board of Directors.
As our remediation efforts are still on-going, we will continue to consider the need for additional resources or to implement further enhancements to our policies and procedures as necessary to further improve our internal control over financial reporting. As we work to improve our internal control over financial reporting, we may modify our remediation plan and may implement measures as we continue to review, optimize and enhance our financial reporting controls and procedures in the ordinary course. The material weakness will not be considered remediated until the remediated controls have been operating for a sufficient period of time and can be evidenced through testing that these are operating effectively.
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Changes in Internal Control over Financial Reporting
Except for the material weakness identified by management and described above, there were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period ended September 28, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, intends that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
CORNERSTONE BUILDING BRANDS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceeding.
See Part I, Item 1, "Condensed Consolidated Financial Statements", Note 13 - Commitments and Contingencies, which is incorporated herein by reference.
Item 1A. Risk Factors.
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2023 (the "2023 Form 10-K"). The risks disclosed in the 2023 Form 10-K, and information provided elsewhere in this report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known, or that we currently deem to be immaterial, may materially adversely affect our business, financial condition or results of operations. We are including the following supplemental risk factor, which should be read in conjunction with our description of risk factors disclosed in the 2023 Form 10-K.
We have identified a material weakness in our internal control over financial reporting and, if our remediation of this material weakness is not effective, or if we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our results of operations.
As discussed in Item 4, "Controls and Procedures", in the course of preparing our financial statements for the interim period ended September 28, 2024, management identified a material weakness in our internal control over financial reporting that existed due to the implementation of a new enterprise resource planning ("ERP") system within the Shelter Solutions reportable segment. The presence of this material weakness creates a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis. However, no such material misstatement has occurred to date.
We are taking steps to address these control issues. The remediation steps will require that, among other items: (i) functional business experts are identified, trained, and meet established requirements, (ii) business users have sufficient understanding of the underlying functionality being tested, and (iii) additional levels of review are established throughout the development cycle.
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While we believe that these efforts will remediate the material weakness identified, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness over a sustained period of financial reporting cycles.
We cannot assure you that the measures we have taken to date, and that we are continuing to implement, will be sufficient to remediate the material weakness we have identified or that we will not uncover additional material weaknesses in the future. If the steps we take do not remediate the material weakness in a timely manner, there could continue to be a reasonable possibility that these control deficiencies or others could result in a material misstatement of our consolidated financial statements that would not be prevented or detected on a timely basis.
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Item 6. Exhibits.
Index to Exhibits
Exhibit No. Description
4.1
*31.1
Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002)
*31.2
Rule 13a-14(a)/15d-14(a) Certifications (Section 302 of the Sarbanes-Oxley Act of 2002)
**32.1
Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002)
**32.2
Certifications pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act of 2002)
*101.INS Inline XBRL Instance Document
*101.SCH Inline XBRL Taxonomy Extension Schema Document
*101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF Inline XBRL Taxonomy Definition Linkbase Document
*101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
*101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Filed herewith
** Furnished herewith
† Management contracts or compensatory plans or arrangements
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CORNERSTONE BUILDING BRANDS, INC.
Date: November 12, 2024 By: /s/ Jeffrey S. Lee
Jeffrey S. Lee
Executive Vice President and Chief Financial Officer
Date: November 12, 2024 By: /s/ Wayne F. Irmiter
Wayne F. Irmiter
Senior Vice President and Chief Accounting Officer
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