CORNERSTONE BUILDING BRANDS : Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)


The following information should be read in conjunction with the unaudited
consolidated financial statements included herein under “Item 1. Unaudited
Consolidated Financial Statements” and the audited consolidated financial
statements and the notes thereto and “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2019.


FORWARD LOOKING STATEMENTS
This Quarterly Report includes statements concerning our expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements that are not historical facts. These
statements are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied by these statements. In some cases, our
forward-looking statements can be identified by the words "anticipate,"
"believe," "continue," "could," "estimate," "expect," "forecast," "goal,"
"intend," "may," "objective," "plan," "potential," "predict," "projection,"
"should," "will," "target" or other similar words. We have based our
forward-looking statements on our management's beliefs and assumptions based on
information available to our management at the time the statements are made. We
caution you that assumptions, beliefs, expectations, intentions and projections
about future events may and often do vary materially from actual results.
Therefore, we cannot assure you that actual results will not differ materially
from those expressed or implied by our forward-looking statements. Accordingly,
investors are cautioned not to place undue reliance on any forward-looking
information, including any earnings guidance, if applicable. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, these expectations and the related statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from those projected. These risks, uncertainties and other factors
include, but are not limited to:
•industry cyclicality and seasonality and adverse weather conditions;
•challenging economic conditions affecting the nonresidential construction
industry;
•downturns in the residential new construction and repair and remodeling end
markets, or the economy or the availability of consumer credit;
•volatility in the United States ("U.S.") economy and abroad, generally, and in
the credit markets;
•the severity, duration and spread of the COVID-19 pandemic, as well as actions
that may be taken by the Company or governmental authorities to contain COVID-19
or to treat its impact;
•an impairment of our goodwill and/or intangible assets;
•our ability to successfully develop new products or improve existing products;
•the effects of manufacturing or assembly realignments;
•seasonality of the business and other external factors beyond our control;
•commodity price volatility and/or limited availability of raw materials,
including steel, PVC resin, glass and aluminum;
•our ability to identify and develop relationships with a sufficient number of
qualified suppliers and to avoid a significant interruption in our supply
chains;
•retention and replacement of key personnel;
•enforcement and obsolescence of our intellectual property rights;
•costs related to compliance with, violations of or liabilities under
environmental, health and safety laws;
•changes in building codes and standards;
•competitive activity and pricing pressure in our industry;
•our ability to make strategic acquisitions accretive to earnings;
•our ability to carry out our restructuring plans and to fully realize the
expected cost savings;
•global climate change, including legal, regulatory or market responses thereto;
•breaches of our information system security measures;
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•damage to our computer infrastructure and software systems;
•necessary maintenance or replacements to our enterprise resource planning
technologies;
•potential personal injury, property damage or product liability claims or other
types of litigation;
•compliance with certain laws related to our international business operations;
•increases in labor costs, potential labor disputes, union organizing activity
and work stoppages at our facilities or the facilities of our suppliers;
•significant changes in factors and assumptions used to measure certain of our
defined benefit plan obligations and the effect of actual investment returns on
pension assets;
•the cost and difficulty associated with integrating and combining acquired
businesses;
•volatility of the Company's stock price;
•substantial governance and other rights held by the Investors;
•the effect on our common stock price caused by transactions engaged in by the
Investors, our directors or executives;
•our substantial indebtedness and our ability to incur substantially more
indebtedness;
•limitations that our debt agreements place on our ability to engage in certain
business and financial transactions;
•our ability to obtain financing on acceptable terms;
•downgrades of our credit ratings;
•the effect of increased interest rates on our ability to service our debt; and
•other risks detailed under the caption "Risk Factors" in this Quarterly Report
on Form 10-Q, and in Part I, Item 1A in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2019 (the "2019 Form 10-K"), and other filings we
make with the SEC.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this report, including those described under the caption "Risk
Factors" in this report and the 2019 Form 10-K, and other risks described in
documents subsequently filed by the Company from time to time with the SEC. We
expressly disclaim any obligations to release publicly any updates or revisions
to these forward-looking statements to reflect any changes in our expectations
unless the securities laws require us to do so.
OVERVIEW
Cornerstone Building Brands, Inc. (together with its subsidiaries, unless the
context requires otherwise, the "Company," "Cornerstone,"we," "us" or "our") is
a leading North American integrated manufacturer of external building products
for the residential, repair & remodel, and commercial construction industries.
We design, engineer, manufacture and market external building products through
our three operating segments, Windows, Siding, and Commercial.
In our Windows segment, our principal products include vinyl, aluminum-clad
vinyl, aluminum, wood and clad-wood windows and patio doors and steel, wood, and
fiberglass entry doors that serve both the new construction and the home repair
and remodeling sectors in the United States and Canada. We continue introducing
new products to the portfolio which allow us to enter or further penetrate new
distribution channels and customers. Our national manufacturing footprint
combined with the breadth of our product lines and our multiple price point
strategy enable us to target multiple distribution channels (wholesale and
specialty distributors, retailers and manufactured housing) and end user markets
(new construction and home repair and remodeling).
In our Siding segment, our principal products include vinyl siding and skirting,
steel siding, vinyl and aluminum soffit, aluminum trim coil, aluminum gutter
coil, aluminum gutters, aluminum and steel roofing accessories, cellular PVC
trim and mouldings, J-channels, wide crown molding, window and door trim,
F-channels, H-molds, fascia, undersill trims, outside/inside corner posts, rain
removal systems, injection molded designer accents such as shakes, shingles,
scallops, shutters, vents and mounts, vinyl fence, vinyl railing, and stone
veneer in the United States and Canada. Our national manufacturing footprint
combined with the breadth of our product lines and our multiple brand and price
point strategy enable us to target multiple distribution channels (wholesale and
specialty distributors, retailers and manufactured housing) and end users (new
construction and home repair and remodeling).
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In our Commercial segment, we manufacture and distribute extensive lines of
metal products for the nonresidential construction market under multiple brand
names through a nationwide network of plants and distribution centers. We offer
a number of advantages over traditional construction alternatives, including
shorter construction time, more efficient use of materials, lower construction
costs, greater ease of expansion and lower maintenance costs. Our Commercial
segment also provides metal coil coating services for commercial and
construction applications, servicing both internal and external customers. We
sell our products for both new construction and repair and retrofit
applications.
The Company's current fiscal quarters are based on a four-four-five week
calendar with periods ending on the Saturday of the last week in the quarter
except for December 31st which will always be the year-end date. Therefore, the
financial results of certain fiscal quarters may not be comparable to prior
fiscal quarters.
We assess performance across our operating segments by analyzing and evaluating,
among other indicators, gross profit and operating income, as well as whether
each segment has achieved its projected sales goals. In assessing our overall
financial performance, we regard growth in earnings, as the key indicator of
shareholder value.
Impact of COVID-19
Overview
In March 2020, the World Health Organization categorized Coronavirus Disease
2019 ("COVID-19") as a pandemic, and the President of the United States declared
the COVID-19 outbreak a national emergency. The impact of the COVID-19 pandemic
has created significant volatility in the global economy and led to reduced
economic activity. There have been extraordinary actions taken by international,
federal, state, and local public health and governmental authorities to contain
and combat the outbreak and spread of COVID-19 in regions throughout the world,
including travel bans, quarantines, "stay-at-home" orders, and similar mandates
for many individuals to substantially restrict daily activities and for many
businesses to curtail or cease normal operations. The pandemic has resulted, and
may continue to result, in significant economic disruption that has and may
likely continue to adversely affect our business. While we are unable to predict
the duration or scope of the overall impact the COVID-19 pandemic will have on
our business, results of operations, or liquidity, we believe it is important to
describe in the following sections the impact of COVID-19 has had on our
business, how our response to the pandemic is progressing, and how our results
and financial condition may change going forward.
Health and Safety
From the earliest signs of the outbreak, we have taken proactive, aggressive
action to protect the health and safety of our employees, customers, partners
and suppliers. We enacted rigorous safety measures in all of our sites,
including facility cleaning at all locations, implementing social distancing
protocols, requiring working from home for those employees that do not need to
be physically present on the manufacturing floor to perform their work,
suspending unnecessary travel, enhancing employee communications, implementing
temperature check plans at the entrances to our facilities, and providing masks
and other protective equipment to those employees who must be physically
present. We expect to continue to implement these measures until we determine
that the COVID-19 pandemic is adequately contained for purposes of our business,
and we may take further actions as government authorities require or recommend
or as we determine certain procedures to be in the best interests of our
employees, customers, partners and suppliers.
Operations
As a result of the COVID-19 pandemic, federal, state and international
authorities have implemented and are continuing to implement numerous and
constantly evolving measures to try to contain the virus, such as limits on
gatherings, quarantine or shelter-in-place mandates, and business shutdowns. We
have important manufacturing operations in the U.S., Canada, and Mexico which
have been affected by the outbreak with increased absenteeism creating operating
inefficiencies. Measures providing for business shutdowns generally exclude
certain essential services such as construction, and those essential services
commonly include critical infrastructure and the businesses that support that
critical infrastructure. While the majority of our facilities currently remain
operational, these measures have impacted and may further impact our workforce
and operations, as well as those of our customers, vendors and suppliers. For
example, we closed our North Brunswick Windows facility in New Jersey during
April 2020 and reopened it in early May given the outbreak in the Northeast and
our Peachtree City, Georgia Windows facility was also closed for a few weeks in
April for extensive cleaning. Substantially all production requirements were
effectively shifted to other window manufacturing plants during April 2020 to
meet customer demand. While federal and state measures may be modified or
extended, we currently expect that our manufacturing facilities will remain
operational. However, any deterioration in the pandemic in our manufacturing
facilities or their local communities or any federal, state, or local limits on
construction manufacturing facilities could have a negative impact on our
operations in the future.
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Supply

We have not currently experienced any significant impacts or interruptions to
our supply chain as a result of the COVID-19 pandemic. However, certain of our
suppliers have faced difficulties maintaining operations in light of federal and
state ordered restrictions and shelter-in-place mandates. Although we regularly
monitor the financial health of companies in our supply chain, financial
hardship on our suppliers or sub-suppliers caused by the COVID-19 pandemic could
cause a disruption in our ability to obtain raw materials or components required
to manufacture our products, adversely affecting our operations. To mitigate the
risk of any potential supply interruptions from the COVID-19 pandemic, we
continue to monitor our critical suppliers operational and financial
performance.
Demand
The outbreak has significantly increased economic and demand uncertainty. While
during the three months ended April 4, 2020, we experienced stable demand across
the Company, we expect our business will most likely be negatively impacted
during the second and third quarters of 2020. According to the U.S. Census
Bureau, March national housing starts declined month over month by 22.3% with
the Northeast declining 42.5% month over month. Our Commercial business
typically lags new construction performance by 18-24 months, though the timing
of the anticipated negative impact of our future financial performance is
uncertain.
Cost Reductions and Liquidity
In light of the COVID-19 pandemic, the Company has implemented a range of
actions aimed at reducing costs and preserving liquidity. These actions include
the closure of our Ambridge, Pennsylvania Commercial facility, limiting travel
costs, voluntary severance program, an additional workforce reduction, 2,100
furloughs, a hiring freeze, a deferral of annual wage raises, and reducing
discretionary and non-essential expenses such as consulting expenses. The
Company will continue to evaluate further ways to rationalize facilities and
manage costs in line with reduced net sales levels as the impact of COVID-19
develops for the remainder of 2020.
Although there is uncertainty related to the anticipated impact of the COVID-19
outbreak on our future results, we believe our business model, our current cash
reserves and the recent steps we have taken to strengthen our balance sheet,
such as increasing our borrowings under our ABL Facility to $415.0 million and
borrowings under our Cash Flow Revolver to $115.0 million, leave us
well-positioned to manage our business through this crisis as it continues to
unfold.
In addition to the ABL Facility and Cash Flow Revolver borrowings, we have
reduced our anticipated capital expenditures by $30.0 million projected for 2020
to focus our expenditures on key strategic initiatives such as automation and
critical maintenance items. Based on these cumulative actions and our current
projections, we believe our existing balances of domestic cash and cash
equivalents and our currently anticipated operating cash flows will be
sufficient to meet our cash needs arising in the ordinary course of business for
the next twelve months.
We continue to monitor the rapidly evolving situation and guidance from
international and domestic authorities, including federal, state and local
public health authorities and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside our
control requiring us to adjust our operating plan. As such, given the dynamic
nature of this national emergency, we cannot reasonably estimate the impacts of
COVID-19 on our financial condition, results of operations or cash flows for
future periods. In addition, see Part II-Item 1A, "Risk Factors," included
herein for updates to our risk factors regarding risks associated with the
COVID-19 pandemic.
Kleary Acquisition
On March 2, 2020, the Company acquired 100% of the issued and outstanding shares
of the common stock of Kleary Masonry, Inc. ("Kleary") for total consideration
of $40.0 million. The transaction was financed with cash on hand and through
borrowings under the Company's asset-based revolving credit facility. Kleary
primarily services residential customers with manufactured stone installations
and commercial customers with manufactured wall installations in the Sacramento,
California area. Kleary's results are reported within the Siding business
segment.

Environmental Stoneworks Acquisition
On January 12, 2019, the Company entered into a Unit Purchase Agreement (the
"Purchase Agreement") with Environmental Materials, LLC, a Delaware limited
liability company ("ESW"), the Members of Environmental Materials, LLC (the
"Sellers") and Charles P. Gallagher and Wayne C. Kocourek, solely in their
capacity as the Seller Representative (as defined in the Purchase Agreement),
pursuant to which, on February 20, 2019, the Company's wholly-owned subsidiary,
Ply Gem Industries, Inc., purchased from the Sellers 100% of the outstanding
limited liability company interests of Environmental Stoneworks (the
"Environmental Stoneworks Acquisition") for total consideration of $182.6
million, subject to post-closing adjustments. The transaction was financed
through borrowings under the Company's asset-based revolving credit facility.

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Three Months Ended April 4, 2020
Consolidated sales increased by approximately 4.6% during the three months ended
April 4, 2020 as compared to the three months ended March 30, 2019. The
improvement from the prior year was due to better price and mix across each of
our business segments and volume from four additional ship days in the three
months ended April 4, 2020 compared to the three months ended March 30, 2019. We
had three additional ship days from the timing of our fiscal calendar as well as
an additional day due to the leap year occurring during the three months ended
April 4, 2020.
The Company's gross profit percentage for the three months ended April 4, 2020
was 20.7% as compared to 17.5% for the three months ended March 30, 2019. The
320 basis point increase in gross profit percentage can be partially attributed
to approximately $16.2 million in additional costs of goods sold related to the
fair value premium of the Ply Gem and ESW inventory on the respective
acquisition dates that negatively impacted gross profit margins during the three
months ended March 30, 2019. In addition, we achieved favorable price and mix
coupled with lower material costs which enabled margin expansion during the
three months ended April 4, 2020.
The Company's selling, general, and administrative expenses increased a marginal
30 basis points during the three months ended April 4, 2020 compared to the
three months ended March 30, 2019. The Company's restructuring and impairment
costs increased $10.4 million during the three months ended April 4, 2020
compared to the three months ended March 30, 2019 primarily due to severance
costs as part of our ongoing efforts to rationalize operational and
organizational structures. Our acquisition costs decreased 65.5% as our Merger
related activities begin to decrease, with only the Kleary acquisition occurring
during the three months ended April 4, 2020.
The Company recognized a non-cash goodwill impairment of $503.2 million during
the three months ended April 4, 2020 as a result of COVID-19 pandemic and the
resulting impact on our market valuation and the near-term economic
uncertainties associated with the pandemic.
Industry Conditions
Residential (Siding and Windows)
Our sales and earnings are subject to both seasonal and cyclical trends and are
influenced by general economic conditions, interest rates, the price of material
costs relative to other building materials, the level of nonresidential
construction activity, roof repair and retrofit demand and the availability and
cost of financing for construction projects. Our sales normally are lower in the
first and fourth quarters of each fiscal year compared to the second and third
quarters because of unfavorable weather conditions for construction and typical
business planning cycles affecting construction.
Our residential building products are typically installed on a new construction
home 90 to 120 days after the start of the home, therefore, there is a lag
between the timing of the single-family housing start date and the time in which
our products are installed on a home. From an industry perspective, we evaluate
the new construction environment by reviewing the U.S. Census Bureau single
family housing start statistics to assess the performance of the new
construction market for a normal period. For the three months ended April 4,
2020, we evaluated U.S. Census Bureau single family housing starts in the period
from September 2019 to December 2019 to assess the demand impacts for our
products for the three months ended April 4, 2020 noting that single family
housing starts increased 7.2% on a lag effected basis due to favorable demand
conditions. We also examine where these single-family housing starts occur
geographically as the Northeast, which decreased 16.6%, and Midwest, which
decreased 6.5%, are significant vinyl siding concentrated areas relative to the
South which increased 19.1% and the West which was flat. For Canada, we evaluate
the Canada Mortgage and Housing Corporate statistics which showed housing starts
increasing 7.1% for the first quarter compared to 2019.
In addition to new construction, we also evaluate the repair and remodeling
market to assess residential market conditions by evaluating the Leading
Indicator of Remodeling Activity ("LIRA"). For the first quarter of 2020, LIRA
reflected that the trailing 12 months of remodeling activity increased 5.2% from
2019. While LIRA is a remodeling economic indicator as it tracks all remodeling
activity including kitchen, bathroom and low-ticket remodeling, it is not a
specific metric for our residential businesses measuring solely windows and
siding remodeling growth. Therefore, we utilize this index as a trend indicator
for our repair and remodeling business.
Finally, we assess our performance relative to our competitors and the overall
siding industry by evaluating the marketing indicators produced by the Vinyl
Siding Institute ("VSI"), a third party which summarizes vinyl siding unit sales
for the industry. For the first quarter of 2020, the VSI reported that siding
units increased 5.1% for the industry. Overall, our Siding segment, including
stone, is weighted to the repair and remodeling market with approximately 49% of
our net sales being attributed to repair and remodeling with the remaining 51%
attributed to the new construction market. Historically, we evaluate our net
sales performance within the Windows segment by evaluating our net sales for the
new construction market and the repair and remodeling market. Overall, our
Windows segment is relatively balanced with approximately 55% of our net sales
attributed to new construction with the remaining 45% attributed to the repair
and remodeling market.
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Commercial

Our sales and earnings are subject to both seasonal and cyclical trends and are
influenced by general economic conditions, interest rates, the price of material
costs relative to other building materials, the level of nonresidential
construction activity, roof repair and retrofit demand and the availability and
cost of financing for construction projects. Our sales normally are lower in the
first and fourth quarters of each fiscal year compared to the second and third
quarters because of unfavorable weather conditions for construction and typical
business planning cycles affecting construction.
According to Dodge Data & Analytics ("Dodge"), low-rise nonresidential
construction starts, as measured in square feet and comprising buildings of up
to five stories, were down approximately 9% during the first three months of
2020 as compared to the same period in 2019.
The leading indicators that we follow and that typically have the most
meaningful correlation to nonresidential low-rise construction starts are the
American Institute of Architects' ("AIA") Architecture Mixed Use Index, Dodge
Residential single family starts and the Conference Board Leading Economic Index
("LEI"). Historically, there has been a very high correlation to the Dodge
low-rise nonresidential starts when the three leading indicators are combined
and then seasonally adjusted.
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RESULTS OF OPERATIONS
Operating segments are defined as components of an enterprise that engage in
business activities for which discrete financial information is available that
is evaluated on a regular basis by the chief operating decision maker to make
decisions about how to allocate resources to the segment and assess the
performance of the segment. We have three operating segments: (i) Windows, (ii)
Siding, and (iii) Commercial. Our operating segments operate in the commercial
and residential new construction, and repair & remodel construction markets.
Sales and earnings are influenced by general economic conditions, the level of
residential and nonresidential construction activity, commodity costs, such as
steel, aluminum, and PVC, other input costs such as labor and freight, and the
availability and terms of financing available for construction. The operating
segments follow the same accounting policies used for our consolidated financial
statements.
Corporate assets consist primarily of cash, investments, prepaid expenses,
current and deferred taxes and property, plant and equipment associated with our
headquarters in Cary, North Carolina and office in Houston, Texas. These items
(and income and expenses related to these items) are not allocated to the
operating segments. Corporate unallocated expenses include share-based
compensation expenses, acquisition costs and other expenses related to
executive, legal, finance, tax, treasury, human resources, information
technology and strategic sourcing, and corporate travel expenses. Additional
unallocated amounts primarily include non-operating items such as interest
income, interest expense and other income (expense). See Note 19 - Segment
Information in the notes to the unaudited consolidated financial statements for
more information on our segments.
The following table represents sales and operating income (loss) attributable to
these operating segments for the periods indicated (in thousands):
                                                                            

Three Months Ended

                                                            April 4,                      March 30,
                                                              2020             %             2019             %
Net sales:
Windows                                                  $   448,450         40.3       $   421,594         39.6
Siding                                                       241,043         21.6           218,277         20.5
Commercial                                                   424,318         38.1           424,961         39.9
Total net sales                                          $ 1,113,811        100.0       $ 1,064,832        100.0
Operating loss:
Windows                                                  $  (313,190)$    (4,319)
Siding                                                      (168,867)                       (11,654)
Commercial(1)                                                 16,841                         24,310
Corporate(1)                                                 (35,575)                       (35,702)
Total operating loss                                        (500,791)                       (27,365)
Unallocated other expense, net                               (59,296)                       (56,549)
Loss before taxes                                        $  (560,087)$   (83,914)

(1)Commercial operating income for the three months ended March 30, 2019
includes $8.3 million of costs previously included in Corporate operating loss
to conform to current presentation.

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THREE MONTHS ENDED APRIL 4, 2020 COMPARED TO THREE MONTHS ENDED MARCH 30, 2019
Windows
                                                                      Three Months Ended
(Amounts in thousands)                               April 4, 2020                                 March 30, 2019
Statement of operations data:
Net sales                                   $    448,450           100.0  %       $  421,594              100.0  %
Gross profit                                      74,001            16.5  %           62,340               14.8  %
SG&A expenses (including acquisition costs)       45,847            10.2  %           49,413               11.7  %
Amortization of intangible assets                 20,354             4.5  %           17,246                4.1  %
Goodwill impairment                              320,990            71.6  %                -                  -  %
Operating loss                                  (313,190)          (69.8) %           (4,319)              (1.0) %


Net sales for the three months ended April 4, 2020 were $448.5 million compared
to $421.6 million for the three months ended March 30, 2019, an increase of
$26.9 million or 6.4%. The net sales increase can be primarily attributed to
having four additional ship days in the three months ended April 4, 2020 in
relation to the prior year period due to the timing of the Company's fiscal
calendar as well as favorable price/mix. Our net sales for the U.S. and Canadian
markets were approximately $411.8 million and $36.7 million, respectively, for
the three months ended April 4, 2020 compared to $387.1 million and $34.5
million, respectively, for the three months ended March 30, 2019. The 6.4% net
sales increase for the U.S. was consistent with the 7.2% increase in housing
starts and the 5.2% LIRA increase for the first quarter of 2020. The Canadian
net sales increase of 6.4% was consistent with the housing industry increase
supported by the CMHC. For the three months ended April 4, 2020, foreign
currency negatively impacted our net sales by $0.5 million.
Gross profit for the three months ended April 4, 2020 was $74.0 million, an
increase of $11.7 million or 18.7% from the $62.3 million for the three months
ended March 30, 2019. The gross profit increase can be attributed to the 6.4%
net sales increase combined with favorable price and mix combined with synergy
and cost-out initiatives. We announced price increases for our products in
January 2020 of 5-8% which favorably impacted our average selling prices by 4.9%
for the three months ended April 4, 2020. Our principal raw materials for
Windows are PVC resin, aluminum, and glass. For the three months ended April 4,
2020, PVC resin and glass material costs increased while aluminum (Midwest
Ingot) costs decreased compared to the three months ended March 30, 2019. We
pass along increases in raw material input costs to our customers but normally
there is a lag period of approximately 90-120 days between the impact of higher
raw material costs and customer pricing actions. In addition to raw material
costs, we closely monitor labor and freight costs. Labor costs have trended
higher recently given the shortage of manufacturing labor personnel and wage
inflation pressure. For the three months ended April 4, 2020, foreign currency
negatively impacted our gross profit by $0.1 million.
As a percentage of net sales, our gross profit percentage increased 170 basis
points from 14.8% for the three months ended March 30, 2019 to 16.5% for the
three months ended April 4, 2020. The increase can be attributed to our net
sales increase and favorable price and mix which enabled our gross profit
percentage to expand in relation to the prior year. In addition, we continue to
invest in automation projects within the Windows segment in an effort to
increase operating and manufacturing efficiencies.
Selling, general, and administrative expenses were $45.8 million for the three
months ended April 4, 2020 compared to $49.4 million for the three months ended
March 30, 2019 for a decrease of $3.6 million or 7.2%. The SG&A expense decrease
can be predominantly attributed to lower management incentive compensation
expenses of $1.0 million, lower sales and marketing expenses despite the net
sales increase of $1.2 million, lower legal expenses of $1.2 million, and lower
travel and entertainment expenses of $0.1 million.
As a percentage of net sales, SG&A expenses were 10.2% for the three months
ended April 4, 2020 relative to 11.7% for the three months ended March 30, 2019.
The 150 basis point decrease can be attributed to lower management incentive
compensation expense, lower sales and marketing expenses, and lower legal
expenses in relation to the prior year.
Amortization expense for the three months ended April 4, 2020 increased $3.1
million or 18.0% to $20.4 million compared to $17.2 million for the three months
ended March 30, 2019. The increase relates to the finalization of our fair value
increases for intangible assets in connection with the merger with Ply Gem and
resulting impact on amortization.
Goodwill impairment for the three months ended April 4, 2020 was $321.0 million
as a result of the COVID-19 pandemic, which decreased Windows' discounted cash
flow projections as a result of the likely U.S. economic recession, high
unemployment, and lower consumer confidence.
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Siding

                                                                      Three Months Ended
(Amounts in thousands)                               April 4, 2020                                 March 30, 2019
Statement of operations data:
Net sales                                   $    241,043           100.0  %       $  218,277              100.0  %
Gross profit                                      59,042            24.5  %           33,176               15.2  %
SG&A expenses (including acquisition costs)       29,372            12.2  %           23,444               10.7  %
Amortization of intangible assets                 21,763             9.0  %           21,386                9.8  %
Goodwill impairment                              176,774            73.3  %                -                  -  %
Operating loss                                  (168,867)          (70.1) %          (11,654)              (5.3) %


Net sales for the three months ended April 4, 2020 were $241.0 million compared
to $218.3 million for the three months ended March 30, 2019, an increase of
$22.8 million or 10.4%. The three months ended April 4, 2020 include net sales
of $48.3 million for the Environmental Stonework's ("ESW") acquisition which
occurred on February 20, 2019 and the Kleary Masonry ("Kleary") acquisition
which occurred on March 2, 2020 and $29.7 million for the three months ended
March 30, 2019. Excluding the ESW and Kleary acquisitions, net sales would have
increased $4.1 million or 2.2% for the three months ended April 4, 2020. The net
sales increase can be primarily attributed to having four additional ship days
in the three months ended April 4, 2020 in relation to the prior year period due
to the timing of the Company's fiscal calendar as well as favorable price/mix.
The net sales increase can also be attributed to the 5.2% LIRA increase as well
as the 7.2% increase in housing starts. Our siding unit sales decreased 4.3% in
the U.S. compared to the VSI which illustrated that total siding unit sales
increased 5.1% during the first quarter. The decrease in unit sales relative to
market resulted from our focus on maintaining price discipline in the
competitive landscape. Our net sales for the U.S. and Canadian markets were
approximately $228.1 million and $13.0 million, respectively, for the three
months ended April 4, 2020 compared to $206.9 million and $11.3 million,
respectively for the three months ended March 30, 2019. For the three months
ended April 4, 2020, foreign currency negatively impacted our net sales by $0.4
million.
Gross profit for the three months ended April 4, 2020 was $59.0 million an
increase of $25.9 million or 78.0% from the $33.2 million for the three months
ended March 30, 2019. The three months ended April 4, 2020 include gross profit
for the ESW (acquired February 20, 2019) and Kleary (acquired March 2, 2020) of
$9.2 million and $4.5 million for the three months ended March 30, 2019. In
addition to the ESW and Kleary acquisitions, gross profit for the three months
ended March 30, 2019 was negatively impacted by $14.4 million for the non-cash
inventory fair value step-up associated with the merger with Ply Gem and by $1.9
million for the non-cash inventory step-up associated with the ESW acquisition.
Excluding the ESW and Kleary acquisitions as well as the inventory step-ups,
gross profit would have increased $4.9 million or 10.9% for the three months
ended April 4, 2020. Our gross profit increased as a result of favorable pricing
and material costs for the three months ended April 4, 2020. Our principal raw
materials within Siding are PVC resin and aluminum. For the three months ended
April 4, 2020, PVC resin increased while aluminum (Midwest Ingot) costs
decreased compared to the three months ended March 30, 2019. We historically
pass along increases in raw material input costs to our customers but normally
there is a lag period of approximately 90-120 days between the impact of higher
raw material costs and customer pricing actions. In addition to raw material
costs, we closely monitor labor and freight costs. Labor costs have trended
higher recently given the shortage of manufacturing labor personnel and wage
inflation pressure. For the three months ended April 4, 2020, foreign currency
negatively impacted our gross profit by $0.1 million.
As a percentage of net sales, our gross profit percentage was 25.9% for the
three months ended April 4, 2020, excluding ESW and Kleary and the fair value
step-ups compared to 23.8% for the three months ended March 30, 2019. The 210
basis point increase resulted from improved price and mix and favorable material
costs. We remain committed to lowering costs during the COVID-19 pandemic and
will continue to explore cost take-out initiatives creating a lean culture.
Selling, general, and administrative expenses were $29.4 million for the three
months ended April 4, 2020 including $9.3 million of SG&A expenses attributed to
ESW and Kleary compared to $23.4 million of SG&A expenses for the three months
ended March 30, 2019 which included $4.0 million of SG&A expenses attributed to
ESW. Excluding the impact of the ESW and Kleary acquisitions, SG&A expenses
increased $0.7 million or 3.3% consistent with the 2.2% net sales increase
specifically for sales and marketing related expenses. As a percentage of net
sales excluding the impact of the ESW and Kleary acquisitions, SG&A expenses
were consistent at 10.4% for the three months ended April 4, 2020 compared to
10.3% for the three months ended March 30, 2019.
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Amortization expense for the three months ended April 4, 2020 was $18.2 million
or 9.4% of net sales relative to $20.0 million and 10.6% for the three months
ended March 30, 2019 excluding the impact of ESW and Kleary. The decrease
relates to the finalization of our fair value increases for intangible assets in
connection with the merger with Ply Gem and ESW acquisition and resulting impact
on amortization.
Goodwill impairment for the three months ended April 4, 2020 was $176.8 million
as a result of the COVID-19 pandemic, which decreased Siding's discounted cash
flow projections as a result of the likely U.S. economic recession, high
unemployment, and lower consumer confidence.

Commercial
                                                                        Three Months Ended
(Amounts in thousands)                                April 4, 2020                                     March 30, 2019
Statement of operations data:
Net sales                                   $      424,318           100.0  %             424,961              100.0  %
Gross profit                                        97,844            23.1  %              90,401               21.3  %
SG&A expenses (including acquisition costs)         72,852            17.2  %              63,260               14.9  %
Amortization of intangible assets                    2,744             0.6  %               2,831                0.7  %
Goodwill impairment                                  5,407             1.3  %                   -                  -  %
Operating income                                    16,841             4.0  %              24,310                5.7  %


Net sales decreased $0.6 million or 0.2% for the three months ended April 4,
2020 compared to the three months ended March 30, 2019 due to a slight decline
in tonnage demand that was partially offset by an increase in average selling
price driven by product mix and pricing discipline in a declining steel price
environment. The decline in volumes was the result of management of product and
customer portfolio within our Metal Coil Coating division partially offset by
increasing demand and market share within our Engineered Building Systems
division.
Gross profit increased $7.4 million or 8.2% for the three months ended April 4,
2020 compared to the three months ended March 30, 2019. As a percentage of net
sales, gross profit increased 180 basis points due to pricing discipline as we
saw a slight increase in average selling price per ton while benefiting from
declining steel costs that drove a significant year over year decline in
material cost per ton.
Selling, general, and administrative expenses increased $9.6 million or 15.2%
for the three months ended April 4, 2020 compared to the three months ended
March 30, 2019 primarily due to $11.7 million of restructuring and impairment
charges recorded during the three months ended April 4, 2020 compared to $0.9
million of restructuring and impairment charges recorded during the three months
ended March 30, 2019.
Amortization expense for the three months ended April 4, 2020 was $2.7 million
or 0.6% of net sales consistent with amortization expense of $2.8 million or
0.7% of net sales for the three months ended March 30, 2019.
Goodwill impairment for the three months ended April 4, 2020 was $5.4 million as
a result of the COVID-19 pandemic which decreased our metal coil coating
reporting unit's discounted cash flow projections as a result of the likely U.S.
economic recession, high unemployment, and lower consumer confidence.
                                       40
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Unallocated Operating Earnings (Losses), Interest, and Provision (Benefit) for
Income Taxes

                                            Three Months Ended
(Amounts in thousands)              April 4, 2020       March 30, 2019
Statement of operations data:
SG&A expenses                      $     (30,650)$      (31,269)
Acquisition related expenses              (4,925)              (4,433)
Operating loss                           (35,575)             (35,702)
Interest expense                         (54,835)             (58,286)
Interest income                              338                  215
Currency translation gain (loss)          (4,137)               1,177
Other income (expense), net                 (662)                 345
Income tax benefit                       (18,014)             (23,897)


Unallocated operating losses include items that are not directly attributed to
or allocated to our reporting segments. Such items include legal costs,
corporate payroll, and unallocated finance and accounting expenses. The
unallocated operating loss for the three months ended April 4, 2020 decreased by
$0.1 million or 0.4% compared to the three months ended March 30, 2019 due
primarily to various professional fees and legal costs.
Interest expense decreased to $54.8 million for the three months ended April 4,
2020 compared to $58.3 million for the three months ended March 30, 2019. The
interest expense decrease is primarily due to declining interest rates in fiscal
2020 which impacted the floating rate Term Loan Facility.
Foreign exchange gain (loss) for the three months ended April 4, 2020 was a $4.1
million loss compared to a gain of $1.2 million for the three months ended
March 30, 2019, due to exchange rate fluctuations in the Canadian dollar and
Mexican peso relative to the U.S. dollar.
Consolidated provision (benefit) for income taxes was a benefit of $18.0 million
for the three months ended April 4, 2020 compared to a benefit of $23.9 million
for the three months ended March 30, 2019. The effective tax rate for the three
months ended April 4, 2020 was 3.2% compared to 28.5% for the three months ended
March 30, 2019. The change in the effective tax rate was primarily driven by the
continuing effects associated with the enactment of the U.S. Tax Cuts and Jobs
Act and the goodwill impairment recorded during the three months ended April 4,
2020.

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LIQUIDITY AND CAPITAL RESOURCES
General
Our cash, cash equivalents and restricted cash increased from $102.3 million as
of December 31, 2019 to $483.6 million as of April 4, 2020. The following table
summarizes our consolidated cash flows for the three months ended April 4, 2020
and March 30, 2019 (in thousands):
                                                                            

Three Months Ended

                                                                   April 4, 2020          March 30, 2019
Net cash used in operating activities                             $      (2,224)$      (48,722)
Net cash used in investing activities                                   (67,424)               (209,608)
Net cash provided by financing activities                               453,268                 213,439
Effect of exchange rate changes on cash and cash equivalents             (2,302)                    911

Net increase (decrease) in cash, cash equivalents and restricted
cash

                                                                    381,318                 (43,980)

Cash, cash equivalents and restricted cash at beginning of period 102,307

                 147,607

Cash, cash equivalents and restricted cash at end of period $ 483,625$ 103,627



Operating Activities
Our business is both seasonal and cyclical and cash flows from operating
activities may fluctuate during the year and from year-to-year due to economic
conditions. We rely on cash as well as short-term borrowings, when needed, to
meet cyclical and seasonal increases in working capital needs. These needs
generally rise during periods of increased economic activity or due to higher
levels of inventory and accounts receivable. During economic slowdowns, working
capital needs generally decrease as a result of the reduction of inventories and
accounts receivable. Working capital needs also fluctuate based on raw material
prices.
Net cash used in operating activities was $2.2 million during the three months
ended April 4, 2020 compared to net cash used in operating activities of $48.7
million for the three months ended March 30, 2019. The change in cash flow used
in operations is due to an improvement in collection on accounts receivable in
the first quarter of 2020 compared to the first quarter of 2019 combined with a
reduction in income taxes paid in three months ended April 4, 2020, and normal
seasonal trends in the timing of working capital.
Net cash provided by accounts receivable was $20.5 million for the three months
ended April 4, 2020 compared to $43.6 million used in accounts receivable for
the three months ended March 30, 2019. There was $25.2 million provided by the
Commercial business during the three months ended April 4, 2020 which primarily
drove this change period over period. The remaining changes in accounts
receivable period over period relates to seasonal trends in working capital and
timing of collections. Our days sales outstanding as of April 4, 2020 and
March 30, 2019 were 38.5 days and 39.9 days, respectively.
For the three months ended April 4, 2020, the change in cash flows relating to
inventory was a decrease of $20.7 million compared to an increase of $16.7
million for the three months ended March 30, 2019. We experienced a $9.4 million
cash flow increase in inventory in the Commercial segment as a result of
strategic purchasing during our seasonally slower months and decreasing material
costs that was partially combined with a $30.2 million inventory cash flow
decrease in the Windows and Siding segments during the three months ended
April 4, 2020. Our days inventory on-hand improved to 47.4 days as of April 4,
2020 as compared to 59.2 days as of March 30, 2019 due to strategic purchasing
and lower material costs.
Net cash provided by accounts payable for the three months ended April 4, 2020
was $12.5 million compared to net cash used in accounts payable of $7.2 million
for the three months ended March 30, 2019. Our vendor payments can significantly
fluctuate based on the timing of disbursements, inventory purchases and vendor
payment terms. Our days payable outstanding as of April 4, 2020 decreased to
21.1 days from 23.6 days as of March 30, 2019.
Investing Activities
Net cash used in investing activities was $67.4 million during the three months
ended April 4, 2020 compared to $209.6 million used in investing activities
during the three months ended March 30, 2019. During the three months ended
April 4, 2020, we paid approximately $39.9 million (net of cash acquired) for
the acquisition of Kleary and we used $27.6 million for capital expenditures. In
the three months ended March 30, 2019, we paid approximately $182.4 million, net
of cash acquired, for the acquisition of ESW and used $27.2 million for capital
expenditures.
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Financing Activities
Net cash provided by financing activities was $453.3 million in the three months
ended April 4, 2020 compared to $213.4 million provided by financing activities
in the three months ended March 30, 2019. During the three months ended April 4,
2020, we borrowed $40.0 million on our Current ABL Facility to finance the
acquisition of Kleary, borrowed an additional $305.0 million on our Current ABL
Facility and $115.0 million on our Current Cash Flow Revolver to increase our
cash position and preserve financial flexibility in light of current uncertainty
in the global markets resulting from the COVID-19 pandemic, paid $6.4 million on
quarterly installments on our Current Term Loan and used $0.3 million for the
purchases of shares that were withheld to satisfy minimum tax withholding
obligations arising in connection with the vesting of share-based compensation.
During the three months ended March 30, 2019, we borrowed $220.0 million under
our Current ABL facility, a portion of which was used to finance the
Environmental Stoneworks Acquisition, paid a $6.4 million nominal quarterly
installment on our Current Term Loan and used $0.2 million for the purchases of
shares related to restricted stock that were withheld to satisfy minimum tax
withholding obligations arising in connection with the vesting of restricted
stock awards and units.
We invest our excess cash in various overnight investments which are issued or
guaranteed by the U.S. federal government.
Debt
Our outstanding indebtedness will mature in 2023 (Current ABL Facility and
Current Cash Flow Revolver), 2025 (Current Term Loan Facility), and 2026 (8.00%
Senior Notes). We may not be successful in refinancing, extending the maturity
or otherwise amending the terms of such indebtedness because of market
conditions, disruptions in the debt markets, our financial performance or other
reasons. Furthermore, the terms of any refinancing, extension or amendment may
not be as favorable as the current terms of our indebtedness. If we are not
successful in refinancing our indebtedness or extending its maturity, we and our
subsidiaries could face substantial liquidity problems and may be forced to
reduce or delay capital expenditures, sell assets, seek additional capital or
restructure our indebtedness. The Current Term Loan Facility provides for an
aggregate principal amount of $2,560.0 million. We have also entered into
certain interest rate swap agreements to reduce our variable interest rate risk.
The Current ABL Credit Agreement provides for an asset-based revolving credit
facility which allows aggregate maximum borrowings by the ABL borrowers of up to
$611.0 million. As set forth in the Current ABL Credit Agreement, extensions of
credit under the Current ABL Facility are subject to a monthly borrowing base
calculation that is based on specified percentages of the value of eligible
inventory, eligible accounts receivable and eligible credit card receivables,
less certain reserves and subject to certain other adjustments. Availability
under the Current ABL Facility will be reduced by issuance of letters of credit
as well as any borrowings outstanding thereunder.
As of April 4, 2020, we had an aggregate principal amount of $3,692.2 million of
outstanding indebtedness, comprising $415.0 million of borrowings under the
Current ABL Facility, $2,517.2 million of borrowings under our Current Term Loan
Facility, $115.0 million of borrowings under the Current Cash Flow Revolver and
$645.0 million of 8.00% Senior Notes outstanding. Our excess availability under
the Current ABL Facility was $118.0 million as of April 4, 2020. In addition,
standby letters of credit totaling approximately $29.0 million were outstanding
but undrawn under the ABL Facility.
For additional information, see Note 14 - Long-Term Debt and Note 17 - Fair
Value of Financial Instruments and Fair Value Measurement in the notes to the
unaudited consolidated financial statements.
Cash Flow
We periodically evaluate our liquidity requirements, capital needs and
availability of resources in view of inventory levels, expansion plans, debt
service requirements and other operating cash needs. To meet our short-term and
long-term liquidity requirements, including payment of operating expenses and
repayment of debt, we rely primarily on cash from operations. Beyond cash
generated from operations, $118.0 million is available with our Current ABL
Facility at April 4, 2020, $0.0 million is available with our Current Cash Flow
Revolver and we have an unrestricted cash balance of $475.7 million as of
April 4, 2020.
We expect to contribute $5.2 million to the defined benefit plans and $0.8
million to the postretirement medical and life insurance plans in the year
ending December 31, 2020.
We expect that cash generated from operations and our availability under the ABL
Credit Facility will be sufficient to provide us the ability to fund our
operations and to provide the increased working capital necessary to support our
strategy and fund planned capital expenditures for fiscal 2020 and expansion
when needed.
                                       43
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Our corporate strategy evaluates potential acquisitions that would provide
additional synergies in our Windows, Siding and Commercial segments. From time
to time, we may enter into letters of intent or agreements to acquire assets or
companies in these business lines. The consummation of these transactions could
require substantial cash payments and/or issuance of additional debt.
From time to time, we have used available funds to repurchase shares of our
common stock under our stock repurchase programs. On October 10, 2017 and March
7, 2018, we announced that our Board of Directors authorized new stock
repurchase programs for the repurchase of up to an aggregate of $50.0 million
and an additional $50.0 million, respectively, of our outstanding Common Stock
for a cumulative total of $100.0 million. Under these repurchase programs, we
are authorized to repurchase shares, if at all, at times and in amounts that we
deem appropriate in accordance with all applicable securities laws and
regulations. Shares repurchased are usually retired. There is no time limit on
the duration of the programs. During the three months ended April 4, 2020, there
were no repurchases under the stock repurchase programs. As of April 4, 2020,
approximately $55.6 million remained available for stock repurchases, all under
the programs announced on October 10, 2017 and March 7, 2018. In addition to
repurchases of shares of our common stock under our stock repurchase program, we
also withhold shares of restricted stock to satisfy minimum tax withholding
obligations arising in connection with the vesting of share-based compensation.
We may from time to time take steps to reduce our debt or otherwise improve our
financial position. These actions could include prepayments, open market debt
repurchases, negotiated repurchases, other redemptions or retirements of
outstanding debt, opportunistic refinancing of debt and raising additional
capital. The amount of prepayments or the amount of debt that may be refinanced,
repurchased or otherwise retired, if any, will depend on market conditions,
trading levels of our debt, our cash position, compliance with debt covenants
and other considerations. Our affiliates may also purchase our debt from time to
time through open market purchases or other transactions. In such cases, our
debt may not be retired, in which case we would continue to pay interest in
accordance with the terms of the debt, and we would continue to reflect the debt
as outstanding on our consolidated balance sheets.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPEs"), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As of April 4, 2020, we were not involved in any material
unconsolidated SPE transactions.
CONTRACTUAL OBLIGATIONS
Our contractual obligations principally includes obligations associated with our
outstanding indebtedness, operating lease obligations and inventory purchase
commitments. Contractual obligations did not materially change during the three
months ended April 4, 2020, except for debt activity as disclosed in Note 14 -
Long-Term Debt in the notes to the unaudited consolidated financial statements
and in Liquidity and Capital Resources - Financing Activities, and lease
activity as disclosed in Note 9 - Leases in the notes to the unaudited
consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most important to the portrayal
of our financial position and results of operations. These policies require our
most subjective judgments, often employing the use of estimates about the effect
of matters that are inherently uncertain. Our most critical accounting policies
include those that pertain to revenue recognition, insurance accruals,
share-based compensation, income taxes, accounting for acquisitions, intangible
assets and goodwill, allowance for doubtful accounts, inventory valuation,
property, plant and equipment valuation and contingencies, which are described
in Item 7 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019.
We adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, as of January 1, 2020.
ASU 2016-13 requires an entity to measure all expected credit losses for
financial assets, including trade receivables, held at the reporting date based
on historical experience, current conditions, and reasonable and supportable
forecasts. See Note 2 - Accounting Pronouncements in the notes to the unaudited
consolidated financial statements for a description of the impact of the
adoption of ASU 2016-13.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 - Accounting Pronouncements in the notes to the unaudited
consolidated financial statements for information on recent accounting
pronouncements.
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