ACQUISITIONS

9 Months Ended

Oct. 03, 2020

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, exclusive of the $2.0 million working capital adjustment that was finalized during the three months ended July 4, 2020. 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.

The acquisition of Kleary strengthens the Company's position as a market leader in stone veneer. The Company accounted for the transaction as an acquisition in accordance with the provisions of ASC 805, Business Combinations, which results in a new valuation for the assets and liabilities of Kleary based upon fair values as of the closing date.

The Company determined the fair value of the tangible and intangible assets and the liabilities acquired, and recorded goodwill based on the excess of the fair value of the acquisition consideration over such fair values, as follows (in thousands):


Assets acquired:
Cash	$	143
Accounts receivable	7,235
Inventories	670
Prepaid expenses and other current assets	277
Property, plant and equipment	1,042
Lease right of use assets	445
Intangible assets (trade names/customer relationships)	22,350
Goodwill	11,721
Other assets	680
Total assets acquired	44,563
Liabilities assumed:
Accounts payable	1,126
Other accrued expenses	1,005


Lease liabilities	339
Other long-term liabilities	109
Total liabilities assumed	2,579
Net assets acquired	$	41,984

The $11.7 million of goodwill was allocated to the Siding segment and is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.

During the three and nine months ended October 3, 2020, the Company incurred $6.9 million and $8.1 million, respectively, of acquisition-related costs for Kleary, primarily consisting of a contingent earnout, which are recorded in strategic development and acquisition related costs in the Company’s consolidated statements of operations.

The final acquisition accounting allocation for the acquisition of Kleary remains subject to further adjustments. The specific accounts subject to ongoing acquisition accounting adjustments include accounts receivable, inventories, prepaid expenses and other current assets, goodwill, intangibles, accounts payable, accrued expenses, accrued warranties and other liabilities. Therefore, the measurement period remained open as of October 3, 2020, and the preliminary acquisition accounting allocation detailed above is subject to further adjustment. The Company anticipates completing these acquisition accounting adjustments during the first quarter of fiscal 2021.

Unaudited Pro Forma Financial Information

During the three and nine months ended October 3, 2020, Kleary contributed net sales of $13.3 million and $25.9 million, respectively, a net loss of $0.9 million and net income of $0.8 million, respectively, which has been included within the Company’s consolidated statement of operations. The following table provides unaudited supplemental pro forma results for Cornerstone, prepared in accordance with ASC 805, for the three and nine months ended October 3, 2020 and September 28, 2019 as if the Kleary and ESW (defined below) acquisitions had occurred on January 1, 2019 (in thousands except for per share data):


	Three Months Ended				Nine Months Ended
	October 3, 2020		September 28, 2019		October 3, 2020		September 28, 2019
Net sales	$	1,227,253	$	1,298,307	$	3,434,358	$	3,694,102
Net income (loss) applicable to common shares	30,516		25,164		(482,789)		(19,843)
Net income (loss) per common share:
Basic	$	0.24	$	0.20	$	(3.84)	$	(0.16)
Diluted	$	0.24	$	0.20	$	(3.84)	$	(0.16)

The unaudited supplemental pro forma financial information was prepared based on the historical information of Cornerstone, Environmental Stoneworks and Kleary. The unaudited supplemental pro forma financial information does not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the two acquisitions or any integration costs. Unaudited pro forma balances are not necessarily indicative of operating results had the Environmental Stoneworks and Kleary acquisitions occurred on January 1, 2019 or of future results.

Environmental Stoneworks

On January 12, 2019, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Environmental Materials, LLC, a Delaware limited liability company (“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 ESW (the “Environmental Stoneworks Acquisition”) for total consideration of $182.6 million, subject to certain post-closing adjustments, for ESW. The transaction was financed through borrowings under the Company’s asset-based revolving credit facility.

The Environmental Stoneworks Acquisition, when combined with the Company’s existing stone businesses, positions the Company as a market leader in stone veneer. The Company accounted for the transaction as an acquisition in accordance with the provisions of ASC Topic 805, Business Combinations, which results in a new valuation for the assets and liabilities of ESW based upon fair values as of the closing date.


Assets acquired:
Restricted cash	$	3,379
Accounts receivable	16,825
Inventories	13,062
Prepaid expenses and other current assets	3,677
Property, plant and equipment	14,295
Lease right of use assets	11,372
Intangible assets (trade names/customer relationships)	91,170
Goodwill	63,543
Deferred taxes	474
Other assets	157
Total assets acquired	217,954
Liabilities assumed:
Accounts payable	5,910
Other accrued expenses	14,666


Lease liabilities	11,365
Other long-term liabilities	3,450
Total liabilities assumed	35,391
Net assets acquired	$	182,563

The $63.5 million of goodwill was allocated to the Siding segment and is expected to be deductible for tax purposes. The goodwill is attributable to the workforce of the acquired business and the synergies expected to be realized.