What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-22 · 207 added, 165 removed, 391 unchanged (49% of the section changed)

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As a result, we are required to divest the Company’s Towanda, PA operations (“Towanda”).

Assuming customary closing conditions are met and subject to court approval, we believe the divestiture will occur within the next twelve months and qualifies for held for sale accounting and we have reclassified certain assets and liabilities to assets held for sale in the accompanying financial statements.

The results of Towanda will continue to be reported within our North America operations until the divestiture is finalized.

Assuming customary closing conditions are met and subject to court approval, we believe the divestiture will occur within the next twelve months and qualifies for held for sale accounting.

We have reclassified certain assets and liabilities to assets held for sale in the accompanying financial statements.

We plan to continue to be reporting Towanda within our North America operations until the divestiture is finalized.

For additional information on the Steves litigation and divestiture, see Note 24 - Commitments and Contingencies of our financial statements included elsewhere in this 10-K.

In March 2019, we acquired VPI Quality Windows, Inc., a leading manufacturer of vinyl windows, specializing in customized solutions for mid-rise multi-family, industrial, hospitality and commercial projects.

VPI, headquartered in Spokane, Washington, with operations in Spokane, Washington and Statesville, North Carolina, is part of our North America segment and was acquired for $57.8 million in cash, net of cash acquired.

Factors and Trends Affecting Our Business

Components of Net Revenues

The key components of our net revenues include core net revenues (which we define to include the impact of pricing and volume/mix, as discussed further under the heading, “Product Pricing and Volume/Mix” below), contribution from acquisitions made within the prior twelve months, and the impact of foreign exchange.

Core net revenues reported in our financial statements are impacted by the fluctuating currency values in the geographies in which we operate, which we refer to as the impact from foreign exchange.

The key components of our net revenues include core net revenues (which we define to include the impact of pricing and volume/mix, as discussed further under the heading, “Product Pricing and Volume/Mix” below), contribution from acquisitions and divestitures made within the prior twelve months, and the impact of foreign exchange.

Net revenues reported in our financial statements are impacted by the fluctuating currency values in the geographies in which we operate, which we refer to as the impact from foreign exchange.

Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, percentage changes in pricing are based on management schedules and are not derived directly from our accounting records.

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• geographical shifts in population and other changes in demographics;

• changes in weather patterns.

• changes in weather patterns and extreme weather events.

In addition, we seek to drive demand for our products through the implementation of various strategies and initiatives.

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• innovating and developing new products and technologies;

• investing in branding and marketing strategies, including marketing campaigns in both print and social media, as well as our investments in training centers and mobile training facilities;

• investing in branding and marketing strategies, including marketing campaigns in both print and social media, as well as our investments in training curriculum, in-field training and technologies to facilitate remote learning;

• implementing channel initiatives to enhance our relationships with key channel partners and customers, including optimizing growth through rebate programs in North America.

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The price and mix of products that we sell are important drivers of our net revenues and net income.

Under the heading “Results of Operations,” references to (i) “pricing” refer to the impact of price increases or decreases, as applicable, for particular products between periods based on demand and (ii) “volume/mix” refer to the combined impact of both the number of products we sell in a particular period and the types of products sold, in each case, on net revenues.

Under the heading “Results of Operations,” references to (i) “pricing” refer to the impact of price increases or decreases, as applicable, for particular products between periods and (ii) “volume/mix” refer to the combined impact of both the number of products we sell in a particular period and the types of products sold, in each case, on net revenues.

While we operate in competitive markets, the demand for our innovative products allows us to exercise pricing discipline, which is an important element of our strategy to achieve profitable growth through improved margins.

Our strategy also includes incentivizing our channel partners to sell our higher margin products, and we believe a renewed focus on innovation and the development of new technologies will increase our sales volumes and the overall profitability of our product mix.

Cost Reduction Initiatives

Prior to the ongoing operational transformation being executed by our senior executive team, our operations were managed in a decentralized manner with varying degrees of emphasis on cost efficiency and limited focus on continuous improvement or strategic sourcing.

Our senior management team has a proven track record of implementing operational excellence programs at some of the world’s leading industrial manufacturing businesses, and we believe the same successes can be realized at JELD-WEN.

Key areas of focus of our operational excellence and footprint rationalization programs include:

Cost Reduction and Productivity Initiatives

Our senior management team has a proven track record of implementing operational excellence programs at various large, global manufacturing businesses, and we believe the same successes can be realized at JELD-WEN.

Key areas of focus of our operational excellence, productivity, and footprint rationalization programs include:

• reducing labor, overtime, and waste costs by reducing facility count while optimizing manufacturing capacity and improving planning and manufacturing processes;

• reducing or minimizing increases in material costs through strategic global sourcing and value-added re-engineering of components, in part by leveraging our significant spend and the global nature of our purchases;

• increasing rigor and alignment around capital expenditures with a clear linkage to our strategy and optimizing returns;

• generating value through supplier contracting to enable better supplier performance, strengthen our partnerships with strategic suppliers, and unlock additional value within the supply chain;

• reducing or minimizing increases in material costs and improving product function through value-added re-engineering of components;

• redesigning our supply chain network to reduce lead times and optimize inventory levels to increase cash flow;

• reducing warranty costs by improving quality.

• a JEM-enabled facility rationalization and modernization initiative that will reduce overhead costs and complexity, while increasing our overall capacity and improving our service levels.

We continue to implement our strategic initiatives under JEM to develop the culture and processes of operational excellence and continuous improvement.

These cost reduction initiatives, which include plant closures and consolidations, headcount reductions, and other various initiatives aimed at lowering production and overhead costs, may not produce the intended results within the intended timeframe.

We continue to implement our cost-reduction and productivity strategic initiatives under JEM to develop the culture and processes of operational excellence and continuous improvement.

These cost reduction initiatives, which may include plant closures and consolidations, headcount reductions, and other various initiatives aimed at lowering production and overhead costs, may not produce the intended results within the intended timeframe.

Raw Material Costs

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Changes in freight and duty rates as well as the availability of freight services can have a significant impact on our cost of goods sold.

Freight and duty costs have risen significantly due to a number of factors that have affected the supply and demand of trucking and port services, including increased regulation, such as data logging of miles, increases in general economic activity, labor shortages, and an aging workforce.

Freight and duty costs have risen significantly due to a number of factors that have affected the supply and demand of trucking and port services, including increased regulation, such as logging of miles, increases in general economic activity, labor shortages, and an aging workforce.

We attempt to mitigate some of these cost increases through various internal initiatives and to pass a substantial portion of these increases to our customers;

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Working Capital and Seasonality

Working capital, which is defined as accounts receivable plus inventory less accounts payable, fluctuates throughout the year and is affected by seasonality of sales of our products and of customer payment patterns.

Working capital, which we define as accounts receivable plus inventory less accounts payable, fluctuates throughout the year and is affected by seasonality of sales of our products and of customer payment patterns.

The peak season for home construction and remodeling in our North America and Europe segments, which represent the substantial majority of our revenues, generally corresponds with the second and third calendar quarters, and therefore our sales volume is usually higher during those quarters.

Typically, working capital increases at the end of the first quarter and beginning of the second quarter in conjunction with, and in preparation for, our peak season, and working capital decreases starting in the third quarter as inventory levels and accounts receivable decline.

Inventories fluctuate as we manage availability in our supply chain due to COVID-19 impacts and for some raw materials with long delivery lead times, such as steel, as we work through prior shipments and take delivery of new orders.

Our working capital balances have been impacted by inflation in the current year due to rising costs in raw materials impacting both inventory and accounts payable as well as higher accounts receivable usages as a result of price realization across our product portfolio.

Inventories fluctuate as we manage availability in our supply chain due to the impacts of COVID-19 and the ongoing conflict between Russia and Ukraine, and for certain raw materials with long delivery lead times, as we work through prior shipments and take delivery of new orders.

Our working capital balances have been impacted by inflation in the current year due to rising costs in raw materials impacting both inventory and accounts payable as well as higher accounts receivable balances as a result of price realization across our product portfolio.

Foreign Currency Exchange Rates

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The exchange rates used to translate our foreign subsidiaries’ financial results for the year ended December 31, 2022 compared to the year ended December 31, 2021 reflected, on average, the U.S.

dollar weakened against the Australian dollar, Canadian dollar, and Euro by 9%, 7% and 4%, respectively.

See Item 1A- Risk Factors - Risks Relating to Our Business and Industry, Item 1A- Risk Factors - Exchange rate fluctuations may impact

our business, financial condition, and results of operations, and Item 7A- Quantitative and Qualitative Disclosures About Market Risk- Exchange Rate Risk.

dollar strengthened against the Australian dollar, Canadian dollar, and Euro by 8%, 4% and 13%, respectively.

See Item 1A - Risk Factors - Risks Relating to Our Business and Industry, Item 1A - Risk Factors - Exchange rate fluctuations may impact our business, financial condition, and results of operations, and Item 7A - Quantitative and Qualitative Disclosures About Market Risk- Exchange Rate Risk.

Components of our Operating Results

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• sales of a wide variety of interior and exterior doors, including patio doors, for use in residential and non-residential applications, with and without frames, to a broad group of wholesale and retail customers in all of our geographic markets;

• sales of a wide variety of windows for both residential and certain non-residential uses, to a broad group of wholesale and retail customers primarily in North America, Australia, and the U.K.;

• other sales, including sales of moldings, trim board, cut-stock, glass, stairs, hardware and locks, door skins, shower enclosures, wardrobes, window screens, and miscellaneous installation and other services revenue.

• sales of a wide variety of windows for both residential and certain non-residential uses, to a broad group of wholesale and retail customers primarily in North America and Australia;

• other sales, including sales of moldings, trim board, cut-stock, glass, hardware and locks, door skins, shower enclosures, wardrobes, window screens, and miscellaneous installation and other services revenue.

Net revenues do not include internal transfers of products between our component manufacturing, product manufacturing and assembly, and distribution facilities.

Cost of Sales

Cost of sales consists primarily of material costs, direct labor and benefit costs, including payroll taxes, repair and maintenance, depreciation, utility, rent and warranty expenses, outbound freight, insurance and benefits, supervision and tax expenses.

Cost of sales consists primarily of material costs, direct labor and benefit costs, repair and maintenance, depreciation, utility, rent and warranty expenses, outbound freight, insurance and benefits, supervision and tax expenses.

Material Costs.

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The cost of each of these items is impacted by global supply and demand trends, both within and outside our industry, as well as commodity price fluctuations, conversion costs, energy costs, and transportation costs.

We have and may continue to experience inflation in our material costs, including increased costs for inbound freight, due to supply chain challenges as a result of COVID-19.

We have and may continue to experience inflation in our material costs, including increased costs for inbound freight, due to supply chain challenges as a result of COVID-19 and the ongoing conflict between Ukraine and Russia.

The imposition of new tariffs on imports, new trade restrictions, or changes in tariff rates or trade restrictions may further impact material costs.

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To date, research and development expenses have been expensed as incurred, because the period between achieving technological feasibility and the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant.

We expect our research and development expenses to increase in absolute dollars as we continue to make significant investments in developing new products and enhancing existing products as part of our growth strategy.

Sales and Marketing.

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Sales and marketing expenses are generally variable expenses.

We expect our sales and marketing expenses to increase in absolute dollars as we continue to actively promote our products and services.

General and Administrative .

General and administrative expenses consist of personnel expenses for our finance, legal, human resources, and administrative personnel, as well as the costs of professional services, any allocated overhead, information technology, amortization of intangible assets acquired, and other administrative expenses.

We expect our general and administrative expenses to increase in absolute dollars to support future growth and the related infrastructure of our business.

Impairment and Restructuring Costs

Impairment and restructuring costs consist primarily of all salary-related severance benefits that are accrued and expensed when a restructuring plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable.

In addition to salary-related costs, we incur other restructuring costs when facilities are closed or capacity is realigned within the organization.

Goodwill Impairment

Goodwill impairment consists of goodwill impairment charges associated with our Europe reporting unit.

For more information, refer to Note 5 - Goodwill in our consolidated financial statements included in this 10-K.

Restructuring and Asset Related Charges, Net

Restructuring charges, net consist primarily of all salary-related severance benefits that are accrued and expensed when a restructuring plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable.

In addition to salary-related costs, we incur other restructuring costs and adjustments when facilities are closed or capacity is realigned within the organization.

Upon termination of an employment or commercial contract we record liabilities and expenses pursuant to the terms of the relevant agreement.

For non-contractual restructuring activities, liabilities and expenses are measured and recorded at fair value in the period in which they are incurred.

Asset related charges consist of accelerated depreciation and amortization of assets due to changes in asset useful lives.

Interest Expense, Net

Interest expense, net, relates primarily to interest payments on our credit facilities and debt securities, as well as commitment fees and amortization of any original issue discount or debt issuance costs.

Debt issuance costs are included as an offset to long-term debt in the accompanying consolidated balance sheets and are amortized to interest expense over the life of the applicable facility using the effective interest method.

Debt issuance costs are included as an offset to long-term debt in the accompanying consolidated balance sheets and are amortized to interest expense over the life of the related facility using the effective interest method.

For additional details, see Note 11 - Long-Term Debt in our financial statements for the year ended December 31, 2022 included elsewhere in this 10-K .

Other Income, Net

Other income, net, includes profit and losses related to various miscellaneous non-operating expenses primarily relating to pension benefit income and expenses, governmental pandemic assistance reimbursements relating to COVID-19, legal settlement income, insurance reimbursements, loss on extinguishment of debt, gains and losses on sale of business units, property, and equipment, and certain foreign currency related gains and losses, including from our hedging activities used to mitigate foreign exchange impacts.

Other income, net, includes profit and losses related to various miscellaneous non-operating expenses primarily relating to pension benefit income and expenses, governmental assistance, insurance reimbursements, loss on extinguishment of debt, recovery of cost from interest received on impaired notes, gains and losses on sale of business units, property, and equipment, legal settlement income, credit for overpayments of utility expenses, and certain foreign currency related gains and losses, including from our hedging activities used to mitigate foreign exchange impacts.

Income taxes are recorded using the asset and liability method of accounting for income taxes.

Under this method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement

carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Under this method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered

The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the date of enactment.

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In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic.

In the following weeks, global restrictions, including stay at home and similar orders, were implemented in a significant number of countries in which we operate.

We made, and continue to make, changes to our operations to ensure proper measures are in place for the health and safety of our employees and to satisfy the needs of our customers.

We continue to experience intermittent closures and reduced operating capacity of certain manufacturing facilities, primarily due to local and governmental mandates.

During 2021, we continued to experience increased demand for our products in both residential and remodel channels due to the low residential housing supply, low interest rates, and consumers’ focus on their homes.

In addition, we have and may continue to experience challenges throughout our operations relating to COVID-19, including increased inflation in our supply chain, as well as in raw materials, labor, and freight charges.

We have experienced delays of inbound and outbound deliveries and labor availability issues due to quarantines, site access, and employee absences.

The scope and nature of impacts from COVID-19, most of which are beyond our control, continue to evolve, and the outcome is uncertain.

The ultimate effects of the COVID-19 pandemic on us and the end markets we service, is highly uncertain and will depend on future developments.

Many of the limitations and mandates on operations have been lifted, however, the scope and nature of impacts from COVID-19, most of which are beyond our control, continue to evolve, and the outcome is uncertain.

The ultimate effects of the COVID-19 pandemic on us and the end markets we service, are highly uncertain and will depend on future developments.

Such effects could exist for an extended period even after the pandemic ends.

In February 2022, the Russian military commenced an invasion of Ukraine, which is ongoing as of the date of this report.

As a result, we have experienced shortages in materials and heightened inflation on materials, freight, and other variable costs, such as utilities, primarily in our European operations.

The impact of the ongoing military conflict between Russia and Ukraine and COVID-19 on the global economy including rising prices of raw materials , freight, energy and other critical inputs due to inflation, supply chain disruptions, and the increase in interest rates including home mortgage rates are unpredictable and there may be developments outside our control that may adversely impact our business, operations, and results.

Results of Operations

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Accordingly, totals may not equal the sum of the line items in the tables below.

We define core revenues as revenue excluding the impact of foreign exchange and acquisitions completed in the last twelve months.

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

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Selling, general and administrative 766,092 14.9 % 704,892 14.8 %

Impairment and restructuring charges 2,950 0.1 % 10,469 0.2 %

Goodwill impairment 54,885 1.1 % — — %

Restructuring and asset related charges, net 18,233 0.4 % 2,950 0.1 %

Operating income 106,216 2.1 % 267,425 5.6 %

Interest expense, net 82,060 1.6 % 77,566 1.6 %

Other income (14,503) (0.3) % (2,752) (0.1) %

Other income, net (54,881) (1.1) % (14,503) (0.3) %

Income before taxes 79,037 1.5 % 204,362 4.3 %

204,362 4.3 % 116,675 2.8 %

Income tax expense 33,310 0.6 % 35,540 0.7 %

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Net Revenues – Net revenues increased $357.5 million, or 7.5%, to $5,129.2 million in the year ended December 31, 2022 from $4,771.7 million in the year ended December 31, 2021.

The increase was due to an improvement in core revenues of 10% and a positive impact from foreign exchange of 3%.

Core revenues increased due to a 7% benefit from pricing and favorable volume/mix of 3%.

Gross Margin – Gross margin increased $73.4 million, or 8.1%, to $975.3 million in the year ended December 31, 2021 from $901.9 million in the year ended December 31, 2020.

The increase was driven by core revenue growth of 12%, partially offset by a 5% adverse foreign exchange impact.

Core revenues increased due to a 13% benefit from price realization mostly related to significant cost inflation, partially offset by reductions in volume/mix of 1%.

Gross Margin – Gross margin decreased $29.8 million, or 3.1%, to $945.4 million in the year ended December 31, 2022 from $975.3 million in the year ended December 31, 2021.

Gross margin as a percentage of net revenues was 18.4% in the year ended December 31, 2022 and 20.4% in the year ended December 31, 2021.

The decrease in gross margin percentage was primarily due to the impact of inflation on material costs, freight, and labor compensation in the current period, partially offset by improved pricing, positive manufacturing variances, and favorable volume/mix.

The decrease in gross margin percentage was due primarily to the timing differences between increased input costs and our pricing actions in our end markets.

SG&A Expense – SG&A expense increased $61.2 million, or 8.7%, to $766.1 million in the year ended December 31, 2022 from $704.9 million in the year ended December 31, 2021.

The increase in SG&A expense was primarily due to the non-recurrence of certain savings from cost reduction measures implemented in 2020 in response to COVID-19, primarily related to salary and benefits, and the impact of inflation on compensation in the current period, partially offset by reduced variable compensation and litigation related expenses.

Impairment and Restructuring Charges – Impairment and restructuring charges decreased $7.5 million, or 71.8%, to $3.0 million in the year ended December 31, 2021 from $10.5 million in the year ended December 31, 2020.

Charges incurred in 2021 primarily relate to ongoing restructuring projects within our Europe segment and asset impairment charges in North America.

Charges incurred in 2020 primarily related to severance charges for ongoing restructuring projects across all segments as well as impairment charges primarily related to capitalized costs of certain ERP modules due to delays in implementation and uncertainty of their future use.

For more information, refer to Note 19 - Impairment and Restructuring Charges to our consolidated financial statements included in this 10-K.

SG&A expense as a percentage of net revenues increased to 14.9% in the year ended December 31, 2022 from 14.8% in the year ended December 31, 2021.

The increase in SG&A expense and SG&A as a percentage of net revenues was primarily due to increased variable compensation expenses, self-insurance costs, and sales and marketing expenses, partially offset by decreased legal and professional fees.

Goodwill Impairment – Goodwill impairment charges of $54.9 million in the year ended December 31, 2022 relate to goodwill impairment charges associated with our Europe reporting unit.

For more information, refer to Note 5 - Goodwill in our consolidated financial statements included in this 10-K.

Restructuring and Asset Related Charges, Net – Restructuring and asset related charges, net, increased $15.3 million, or 518.1%, to $18.2 million in the year ended December 31, 2022 from $3.0 million in the year ended December 31, 2021.

The increase in restructuring charges is primarily due to strategic transformation initiatives, cost savings, and footprint rationalization activities in our North America and Europe segments as well as changes to the management structure to align with our operations.

Interest Expense, Net – Interest expense, net, increased $4.5 million, or 5.8%, to $82.1 million in the year ended December 31, 2022 from $77.6 million in the year ended December 31, 2021.

The increase was primarily due to interest on our Senior Secured Notes issued in May 2020, partially offset by lower interest rates throughout 2021.

Other Income – Other income increased $11.8 million, or 427.0%, to $14.5 million in the year ended December 31, 2021 from $2.8 million in the year ended December 31, 2020.

Other income in the year ended December 31, 2021 primarily consisted of foreign currency gains of $9.9 million and reimbursements from governmental pandemic assistance relating to COVID-19 and insurance and of $3.2 million, partially offset by a loss on sale or disposal of property and equipment of $2.0 million and a loss on extinguishment of debt of $1.3 million.

Other income in the year ended December 31, 2020 primarily consisted of foreign currency losses of $11.9 million and pension expense of $1.6 million, offset by reimbursements from governmental pandemic assistance relating to COVID-19 of $7.4 million, a gain on sale of property and equipment of $4.1 million, and insurance reimbursements of $1.4 million.

Income Taxes – Income tax expense increased $10.5 million, or 41.7%, to $35.5 million in the year ended December 31, 2021 from $25.1 million in the year ended December 31, 2020.

The increase was primarily due to an increase to the cost of borrowing on our Term Loan Facility and increased borrowings on the ABL Facility in the current period, partially offset by interest income from interest rate derivatives in the current period, higher interest income earned on cash balances, and the repayment of the term loan portion of the Australia Facility during the second quarter of 2021.

Other Income, Net – Other income, net increased $40.4 million, or 278.4%, to $54.9 million in the year ended December 31, 2022 from $14.5 million in the year ended December 31, 2021.

Other income in the year ended December 31, 2022 primarily consisted of the recovery of cost from interest received on impaired notes of $14.0 million, legal settlement income of $10.5 million, a net gain on sale or disposal of property and equipment of $8.1 million, reimbursements from governmental assistance and insurance of $8.0 million, pension income of $4.5 million, foreign currency gains of $2.3 million, and a credit for overpayments of utility expenses of $2.0 million.

Other income, net in the year ended December 31, 2021 primarily consisted of foreign currency gains of $9.9 million and reimbursements from governmental pandemic assistance relating to COVID-19 and insurance of $3.2 million, partially offset by a loss on sale or disposal of property and equipment of $2.0 million and a loss on extinguishment of debt of $1.3 million.

Income Taxes – Income tax expense decreased $2.2 million, or 6.3%, to $33.3 million in the year ended December 31, 2022 from $35.5 million in the year ended December 31, 2021.

The effective tax rate in the year ended December 31, 2022 was 42.1% compared to 17.4% in the year ended December 31, 2021.

The increase in income tax expense in the year ended December 31, 2021 was primarily due to an increase in income before taxes of $87.7 million, partially offset by a tax benefit from tax credits and GILTI HTE as well as a partial release of U.S.

state valuation allowances.

For more information, refer to Note 13 – Income Taxes to our consolidated financial statements included in this 10-K.

The increase in the effective tax rate in the year ended December 31, 2022 was primarily due to the goodwill impairment charge of $54.9 million.

The decrease in tax expense of $2.2 million in the current period was primarily due to a decrease in income before taxes, partially offset by the mix of income earned between jurisdictions in which the Company does business.

For more information, refer to Note 13 - Income Taxes in our consolidated financial statements included in this 10-K.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

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Selling, general and administrative 704,892 14.8 % 702,715 16.6 %

Impairment and restructuring charges 10,469 0.2 % 21,551 0.5 %

Restructuring and asset related charges, net 2,950 0.1 % 10,469 0.2 %

Operating income 267,425 5.6 % 188,723 4.5 %

Interest expense, net 77,566 1.6 % 74,800 1.8 %

Other income (2,752) (0.1) % (1,409) — %

Other income, net (14,503) (0.3) % (2,752) (0.1) %

Income before taxes 204,362 4.3 % 116,675 2.8 %

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Consolidated Results

Net Revenues – Net revenues decreased $54.1 million, or 1.3%, to $4,235.7 million in the year ended December 31, 2020 from $4,289.8 million in the year ended December 31, 2019.

The decrease was driven by a decline in core revenue of 2% consisting of a 5% decline in volume/mix, partially offset by a 3% pricing benefit.

Net Revenues – Net revenues increased $536.0 million, or 12.7%, to $4,771.7 million in the year ended December 31, 2021 from $4,235.7 million in the year ended December 31, 2020.

The increase was due to an improvement in core revenues of 10% and a positive impact from foreign exchange of 3%.

Core revenues increased due to a 7% benefit from price realization and favorable volume/mix of 3%.

Gross Margin – Gross margin increased $73.4 million, or 8.1%, to $975.3 million in the year ended December 31, 2021 from $901.9 million in the year ended December 31, 2020.

Gross margin as a percentage of net revenues was 20.4% in the year ended December 31, 2021 and 21.3% in the year ended December 31, 2020.

Gross margins increased due to positive manufacturing variances and improved pricing, partially offset by unfavorable volume/mix and the effect of inflation on labor compensation.

SG&A Expense – SG&A expense increased $2.2 million, or 0.3%, to $704.9 million in the year ended December 31, 2021 from $702.7 million in the year ended December 31, 2020.

The increase in SG&A expense was primarily due to increased legal expenses, primarily relating to litigation and environmental accruals and fees, and estimated variable compensation, partially offset by reductions in spending relating to sales, marketing, and travel as a result of cost saving measures implemented in response to COVID-19, and the non-recurrence of acquisition costs recorded in 2019.

Impairment and Restructuring Charges – Impairment and restructuring charges decreased $11.1 million, or 51.4%, to $10.5 million in the year ended December 31, 2020 from $21.6 million in the year ended December 31, 2019.

Charges incurred in 2019 primarily related to plant consolidations in our North America and Australasia segments resulting in impairments of ROU assets and property and equipment as well as severance costs across all segments and corporate.

For more information, refer to Note 19 - Impairment and Restructuring Charges to our consolidated financial statements included in this 10-K.

Restructuring and Asset Related Charges, Net – Restructuring and asset related charges, net decreased $7.5 million, or 71.8%, to $3.0 million in the year ended December 31, 2021 from $10.5 million in the year ended December 31, 2020.

Charges incurred in 2021 primarily relate to ongoing restructuring projects within our Europe segment and asset related charges in North America.

Charges incurred in 2020 primarily related to severance charges for ongoing restructuring projects across all segments as well as asset related charges primarily related to accelerated amortization of capitalized costs of certain ERP modules due to delays in implementation and uncertainty of their future use.

For more information, refer to Note 19 - Impairment and Asset Related Charges, Net to our consolidated financial statements included in this 10-K.

Interest Expense, Net – Interest expense, net, increased $2.8 million, or 3.7%, to $77.6 million in the year ended December 31, 2021 from $74.8 million in the year ended December 31, 2020.

The increase was primarily due to interest on our Senior Secured Notes issued in May 2020, partially offset by reduced borrowings and interest rates under our revolving credit facilities and a lower cost of borrowing on our Term Loan Facility.

Other Income – Other income increased $1.3 million, or 95.3%, to $2.8 million in the year ended December 31, 2020 from $1.4 million in the year ended December 31, 2019.

The other income in the year ended December 31, 2020 primarily consisted of foreign currency losses of $11.9 million and pension expense of $1.6 million, offset by reimbursements from governmental pandemic assistance relating to COVID-19 of $7.4 million, a gain on sale or disposal of property and equipment of $4.1 million, and an insurance reimbursement of $1.4 million.

Other income in the year ended December 31, 2019 was primarily due to foreign currency gains of $7.4 million, a gain on the sale or disposal of business units, property and equipment of $1.5 million, and legal settlement income of $1.2 million, partially offset by pension expense of $10.7 million.

Income Taxes – Income tax expense decreased $32.0 million, or 56.0%, to $25.1 million in the year ended December 31, 2020 from $57.1 million in the year ended December 31, 2019.

The increase was primarily due to interest on our Senior Secured Notes issued in May 2020, partially offset by lower interest rates throughout 2021.

Other Income, Net – Other income, net increased $11.8 million, or 427.0%, to $14.5 million in the year ended December 31, 2021 from $2.8 million in the year ended December 31, 2020.

Other income, net in the year ended December 31, 2020 primarily consisted of foreign currency losses of $11.9 million and pension expense of $1.6 million, offset by reimbursements from governmental pandemic assistance relating to COVID-19 of $7.4 million, a gain on sale of property and equipment of $4.1 million, and insurance reimbursements of $1.4 million.

Income Taxes – Income tax expense increased $10.5 million, or 41.7%, to $35.5 million in the year ended December 31, 2021 from $25.1 million in the year ended December 31, 2020.

The effective tax rate in the year ended December 31, 2021 was 17.4% compared to 21.5% in the year ended December 31, 2020.

The decrease in income tax expense in 2020 was primarily due to a tax

benefit recorded in 2020 as a result of the HTE election and related planning, which resulted in a decrease in the U.S.

valuation allowance, partially offset by tax expense related to a reduction in U.S.

foreign tax credit carryforwards and additional state tax expense related expenses.

state valuation allowances.

For more information, refer to Note 13 - Income Taxes to our consolidated financial statements included in this 10-K.

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We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280-10 - Segment Reporting .

We have determined that we have three reportable segments, organized and managed principally by geographic region.

We have three reportable segments, organized and managed principally by geographic region.

Our reportable segments are North America, Europe, and Australasia.

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We define Adjusted EBITDA as net income (loss), adjusted for the following items:

loss from discontinued operations, net of tax;

equity earnings of non-consolidated entities;

(income) loss from discontinued operations, net of tax;

income tax (benefit) expense;

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interest expense, net;

impairment and restructuring charges;

gain on previously held shares of equity investment;

(gain) loss on sale of property and equipment;

restructuring and asset related charges, net;

net (gain) loss on sale of property and equipment;

share-based compensation expense;

non-cash foreign exchange transaction/translation (income) loss;

other non-cash items;

and costs related to debt restructuring and debt refinancing.

For additional information on segment Adjusted EBITDA, see Note 14 - Segment Information to our consolidated financial statements included in this 10-K.

and other items.

Reconciliations of net income to Adjusted EBITDA for our segments’ operations are as follows:

Year Ended December 31, 2022

(amounts in thousands) North America Europe Australasia Total Operating Segments Corporate and Unallocated Costs Total Consolidated

Net income (loss) $ 260,590 $ (50,796) $ 25,355 $ 235,149 $ (189,422) $ 45,727

Income tax expense (1)

6,963 3,307 12,363 22,633 10,677 33,310

Depreciation and amortization 69,427 31,139 18,622 119,188 12,566 131,754

Interest expense, net 4,011 6,193 3,130 13,334 68,726 82,060

Goodwill impairment — 54,885 — 54,885 — 54,885

Restructuring and asset related charges, net 7,338 6,042 611 13,991 4,242 18,233

Net (gain) loss on sale of property and equipment (8,397) 354 (22) (8,065) 8 (8,057)

Share-based compensation expense 4,870 2,729 1,592 9,191 6,977 16,168

Non-cash foreign exchange transaction/translation loss 148 876 1,024 2,048 12,500 14,548

Other items (2)

7,935 19,596 2,899 30,430 3,098 33,528

Adjusted EBITDA $ 352,885 $ 74,325 $ 65,574 $ 492,784 $ (70,628) $ 422,156

(1) Income tax expense in Corporate and unallocated costs includes the tax impact of US Operations.

(2) Other non-recurring items not core to ongoing business activity for the year ended December 31, 2022 is primarily driven by $16,304 of facility closure, consolidation, and other related costs and adjustments in our European segment;

as well as Corporate and unallocated costs of $8,784 in net legal and professional expenses and settlements, primarily relating to litigation, M&A evaluations, and strategic transformation initiatives, including $(10,500) of income resulting from a legal settlement, and $2,929 relating primarily to exit costs for executives.

Year Ended December 31, 2021

(amounts in thousands) North America Europe Australasia Total Operating Segments Corporate and Unallocated Costs Total Consolidated

Net income (loss) $ 255,975 $ 66,596 $ 32,163 $ 354,734 $ (185,912) $ 168,822

Income tax expense (benefit) (1)

5,704 16,980 14,011 36,695 (1,155) 35,540

Depreciation and amortization 72,095 32,855 20,892 125,842 11,405 137,247

Interest expense, net 6,080 9,282 4,060 19,422 58,144 77,566

Restructuring and asset related charges, net 1,200 1,453 394 3,047 (97) 2,950

Net loss (gain) on sale of property and equipment 1,589 584 (37) 2,136 (87) 2,049

Share-based compensation expense 5,472 2,096 221 7,789 12,420 20,209

Non-cash foreign exchange transaction/translation (income) (51) (10,108) (585) (10,744) (3,025) (13,769)

Other items (2)

4,817 7,554 329 12,700 21,765 34,465

Adjusted EBITDA $ 352,881 $ 127,292 $ 71,448 $ 551,621 $ (86,542) $ 465,079

(1) Income tax expense (benefit) in Corporate and unallocated costs includes the tax impact of US Operations.

(2) Other non-recurring items not core to ongoing business activity for the year ended December 31, 2021 is primarily driven by Corporate and unallocated costs of $17,752 in legal and professional expenses relating primarily to litigation.

Year Ended December 31, 2020

(amounts in thousands) North America Europe Australasia Total Operating Segments Corporate and Unallocated Costs Total Consolidated

Net income (loss) $ 217,407 $ 66,403 $ 21,954 $ 305,764 $ (214,178) $ 91,586

Income tax expense (benefit) (1)

4,284 13,817 11,420 29,521 (4,432) 25,089

Depreciation and amortization 77,361 29,712 19,341 126,414 8,209 134,623

Interest expense, net 5,377 9,451 5,515 20,343 54,457 74,800

Restructuring and asset related charges, net 3,164 3,682 320 7,166 3,303 10,469

Net (gain) loss on sale of property and equipment (4,102) (164) 45 (4,221) 68 (4,153)

Share-based compensation expense 4,836 1,201 1,978 8,015 8,384 16,399

Non-cash foreign exchange transaction/translation (income) loss (39) 9,499 1,245 10,705 2,199 12,904

Other items (2)

7,664 2,762 631 11,057 73,640 84,697

Adjusted EBITDA $ 315,952 $ 136,363 $ 62,449 $ 514,764 $ (68,350) $ 446,414

(1) Income tax expense in Corporate and unallocated costs includes the tax impact of US Operations.

(2) Other non-recurring items not core to ongoing business activity for the year ended December 31, 2020 is primarily driven by Corporate and allocated costs of $66,565 in legal and professional expenses relating primarily to litigation and $6,700 in environmental matters.

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

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Total Consolidated 8.2 % 9.7 %

(1) Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP.

For a discussion of our presentation of Adjusted EBITDA, see Note 14 - Segment Information in our consolidated financial statements.

North America

Net revenues in North America increased $430.1 million, or 15.2%, to $3,259.4 million in the year ended December 31, 2022 from $2,829.2 million in the year ended December 31, 2021.

The increase was primarily due to an increase in core revenues of 12%.

Core revenues increased due to an 10% benefit from pricing and favorable volume/mix of 2%.

Adjusted EBITDA in North America increased $36.9 million, or 11.7%, to $352.9 million in the year ended December 31, 2021 from $316.0 million in the year ended December 31, 2020.

The increase was due to favorable pricing, volume growth, and positive manufacturing variances, partially offset by the impact of inflation on material costs, freight, and labor compensation.

Net revenues in Europe increased $164.7 million, or 13.9%, to $1,352.5 million in the year ended December 31, 2021 from $1,187.8 million in the year ended December 31, 2020.

The increase was primarily due to an increase in core revenue of 9% and a positive impact from foreign exchange of 5%.

Core revenues increased due a 5% benefit from pricing and favorable volume/mix of 4%.

The increase was due to an increase in core revenues of 15%.

Core revenues increased due to a 14% benefit from price realization mostly related to significant cost inflation, and positive volume/mix of 1%.

Adjusted EBITDA in North America remained relatively consistent at $352.9 million in the year ended December 31, 2022 and December 31, 2021, respectively.

While Adjusted EBITDA increased slightly primarily driven by improved volume/mix and productivity, the increase was offset by higher SG&A expenses.

Net revenues in Europe decreased $68.0 million, or 5.0%, to $1,284.5 million in the year ended December 31, 2022 from $1,352.5 million in the year ended December 31, 2021.

The decrease was primarily due to a 12% adverse impact from foreign exchange, partially offset by an increase in core revenue of 7%.

Core revenues increased due to an 11% benefit from price realization mostly related to significant cost inflation, partially offset by lower volume/mix of 4%.

Adjusted EBITDA in Europe decreased $53.0 million, or 41.6%, to $74.3 million in the year ended December 31, 2022 from $127.3 million in the year ended December 31, 2021.

The decrease was primarily due to the impact of inflation on material costs, freight, and labor compensation in the current period, partially offset by favorable pricing and positive manufacturing variances.

Net revenues in Australasia increased $71.1 million, or 13.7%, to $590.0 million in the year ended December 31, 2021 from $518.9 million in the year ended December 31, 2020.

The increase was primarily due to a positive impact from foreign exchange of 9% and an increase in core revenues of 5%.

Core revenues increased due to favorable volume/mix of 3% and a 2% benefit from pricing.

Adjusted EBITDA in Australasia increased $9.0 million, or 14.4%, to $71.4 million in the year ended December 31, 2021 from $62.4 million in the year ended December 31, 2020.

The increase was primarily due to improved volume/mix and positive manufacturing variances, partially offset by the impact of inflation on material costs.

The decrease was primarily due to lower volume/mix, higher SG&A expenses, and negative price/cost, partially offset by improved productivity.

Net revenues in Australasia decreased $4.7 million, or 0.8%, to $585.4 million in the year ended December 31, 2022 from $590.0 million in the year ended December 31, 2021.

The decrease was primarily due to a negative impact from foreign exchange of 8%, partially offset by an increase in core revenues of 7%.

Core revenues increased due to an 8% benefit from price realization mostly related to significant cost inflation, partially offset by reduced volume/mix of 1%.

Adjusted EBITDA in Australasia decreased $5.9 million, or 8.2%, to $65.6 million in the year ended December 31, 2022 from $71.4 million in the year ended December 31, 2021.

The decrease was primarily due to higher SG&A expenses and unfavorable volume/mix, partially offset by favorable price/cost.

Corporate and unallocated costs

Corporate and unallocated costs increased in the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the non-recurrence of certain savings from cost reduction measures implemented in 2020 in response to COVID-19, primarily related to salary and benefits, and the impact of inflation as well as increased health benefit costs and software related expenditures, partially offset by reduced variable compensation expenses resulting in a decrease to Adjusted EBITDA of $18.2 million, or 26.6%.

Corporate and unallocated costs decreased in the year ended December 31, 2022 by $15.9 million, or 18.4%, compared to the year ended December 31, 2021 primarily due to the recovery of cost from interest received on impaired notes, a gain on foreign exchange transactions, reduced legal and professional fees, and insurance recoveries, partially offset by increased variable compensation and self-insurance costs in the current period.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

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North America

Net revenues in North America decreased $5.3 million, or 0.2%, to $2,529.0 million in the year ended December 31, 2020 from $2,534.3 million in the year ended December 31, 2019.

The decrease was primarily due to a decline in core revenues of 1% offset by a 1% increase attributable to the contribution from the acquisition of VPI.

Core revenues decreased due to unfavorable volume/mix of 6%, partially offset by a 5% benefit from pricing.

Net revenues in North America increased $300.2 million, or 11.9%, to $2,829.2 million in the year ended December 31, 2021 from $2,529.0 million in the year ended December 31, 2020.

The increase was primarily due to an increase in core revenues of 12%.

Core revenues increased due to a 10% benefit from price realization and favorable volume/mix of 2%.

Adjusted EBITDA in North America increased $36.9 million, or 11.7%, to $352.9 million in the year ended December 31, 2021 from $316.0 million in the year ended December 31, 2020.

The increase was due to favorable pricing, positive manufacturing variances, reduced marketing and travel expenses, and contributions from our VPI acquisition, partially offset by unfavorable revenue mix and the effect of inflation on labor compensation.

The increase was due to favorable pricing, volume growth, and positive manufacturing variances, partially offset by the impact of inflation on material costs, freight, and labor compensation.

Net revenues in Europe increased $164.7 million, or 13.9%, to $1,352.5 million in the year ended December 31, 2021 from $1,187.8 million in the year ended December 31, 2020.

The increase was primarily due to a favorable impact from foreign exchange of 2%, partially offset by a decline in core revenue of 1%.

Core revenues decreased due to unfavorable volume/mix of 2%, partially offset by a 1% benefit from pricing.

Adjusted EBITDA in Europe increased $20.2 million, or 17.4%, to $136.4 million in the year ended December 31, 2020 from $116.2 million in the year ended December 31, 2019.

The increase was primarily due to positive manufacturing variances and favorable pricing, partially offset by unfavorable revenue mix and the effect of inflation on labor compensation.

Net revenues in Australasia decreased $58.1 million, or 10.1%, to $518.9 million in the year ended December 31, 2020 from $577.0 million in the year ended December 31, 2019.

The decrease was primarily due to a reduction in core revenues of 9% and unfavorable impacts from foreign exchange of 1%.

Core revenues decreased due to unfavorable volume/mix of 8% and reduced pricing of 1%.

Adjusted EBITDA in Australasia decreased $12.0 million, or 16.2%, to $62.4 million in the year ended December 31, 2020 from $74.5 million in the year ended December 31, 2019.

The decrease was primarily due to lower volumes from market headwinds and adverse pricing, partially offset by positive manufacturing variances and reductions in spending relating to sales, marketing, travel, and salaries as a result of cost saving measures implemented in response to COVID-19.

The increase was primarily due to an increase in core revenue of 9% and a positive impact from foreign exchange of 5%.

Core revenues increased due to a 5% benefit from price realization and favorable volume/mix of 4%.

Adjusted EBITDA in Europe decreased $9.1 million, or 6.7%, to $127.3 million in the year ended December 31, 2021 from $136.4 million in the year ended December 31, 2020.

Net revenues in Australasia increased $71.1 million, or 13.7%, to $590.0 million in the year ended December 31, 2021 from $518.9 million in the year ended December 31, 2020.

The increase was primarily due to a positive impact from foreign exchange of 9% and an increase in core revenues of 5%.

Core revenues increased due to favorable volume/mix of 3% and 2% benefit from price realization.

Adjusted EBITDA in Australasia increased $9.0 million, or 14.4%, to $71.4 million in the year ended December 31, 2021 from $62.4 million in the year ended December 31, 2020.

The increase was primarily due to improved volume/mix and positive manufacturing variances, partially offset by the impact of inflation on material costs.

Corporate and unallocated costs

Corporate and unallocated costs increased in the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to increased variable compensation and the impact of foreign exchange hedges, resulting in a decrease to Adjusted EBITDA of $25.4 million, or 59.0%.

Corporate and unallocated costs increased in the year ended December 31, 2021 by $18.2 million, or 26.6%, compared to the year ended December 31, 2020 primarily due to the non-recurrence of certain savings from cost reduction measures implemented in 2020 in response to COVID-19, primarily related to salary and benefits, and the impact of inflation as well as increased health benefit costs and software related expenditures, partially offset by reduced variable compensation expenses.

Liquidity and Capital Resources

We have historically funded our operations through a combination of cash from operations, draws on our revolving credit facilities, and the issuance of non-revolving debt such as our Term Loan Facility, Senior Notes, and Senior Secured Notes.

Working capital, which we define as accounts receivable plus inventory less accounts payable, fluctuates throughout the year and is affected by the seasonality of sales of our products, customer payment patterns, and the translation of the balance sheets of our foreign operations into the U.S.

Working capital fluctuates throughout the year and is impacted by inflation, the seasonality of our sales, customer payment patterns, supply availability, and the translation of the balance sheets of our foreign operations into the U.S.

Typically, working capital increases at the end of the first quarter and beginning of the second quarter in conjunction with, and in preparation for, the peak season for home construction and remodeling in our North America and Europe segments, which represent the substantial majority of our revenues, and decreases starting in the fourth quarter as inventory levels and accounts receivable decline.

Inventories fluctuate for raw materials with long delivery lead times, such as steel, as we work through prior shipments and take delivery of new orders.

As of December 31, 2021, we had total liquidity (a non-GAAP measure) of $837.8 million, consisting of $395.6 million in unrestricted cash, $425.8 million available for borrowing under the ABL Facility, and AUD 22.6 million ($16.4 million) available for borrowing under the Australia Senior Secured Credit Facility (See Note 11 – Long-Term Debt to our consolidated financial statements for additional details regarding amendments made to the ABL Facility in July 2021), compared to total liquidity of $1,121.5 million as of December 31, 2020.

The decrease in total liquidity was primarily due to cash utilized for share repurchases, higher working capital investment, capital expenditures, and repayments of long-term debt and legal settlements, partially offset by the increase in earnings.

As of December 31, 2022, we had total liquidity (a non-GAAP measure) of $645.5 million, consisting of $219.4 million in unrestricted cash, $410.7 million available for borrowing under the ABL Facility, and AUD 22.8 million ($15.4 million) available for borrowing under the Australia Senior Secured Credit Facility, compared to total liquidity of $837.8 million as of December 31, 2021.

The decrease in total liquidity was primarily due to both lower cash balances and lower availability on our ABL Facility at December 31, 2022 compared to December 31, 2021.

The main drivers to our lower cash balances are decreased earnings, higher working capital balances, and share repurchases, partially offset by the non-recurrence of legal settlements paid in 2021.

The reduced ABL Facility availability is driven by increased borrowings in the current period compared to the prior year end.

As of December 31, 2022, our cash balances, including $1.5 million of restricted cash, consisted of $13.5 million in the U.S.

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subsidiaries.

During the fiscal year ended December 31, 2022, the Company repatriated $132.8 million from non-U.S.

subsidiaries and repaid a portion of the outstanding ABL Facility.

Based on our current level of operations, the seasonality of our business and anticipated growth, we believe that cash provided by operations and other sources of liquidity, including cash, cash equivalents, and availability under our revolving credit facilities, will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments, and debt service requirements for at least the next twelve months.

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• Long-term debt and interest obligations – As of December 31, 2022 our outstanding debt balance was $1,759.2 million.

See Note 11 - Long-Term Debt to our consolidated financial statements for additional details regarding the timing of expected future principal payments.

See Note 11 - Long-Term Debt to our consolidated financial statements for additional details regarding the timing of

expected future principal payments.

Interest on long-term debt is calculated based on debt outstanding and interest rates in effect on December 31, 2022, taking into account scheduled maturities and amortization payments.

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• Purchase obligations – As of December 31, 2022, we have purchase obligations of $29.2 million due in 2023 and $14.4 million due in 2024 and thereafter.

These purchase obligations are primarily relating to software hosting services and capital expenditures.

These purchase obligations are primarily relating to software hosting services and in-bound freight.

Purchase obligations are defined as purchase agreements that are enforceable and legally binding and that specify all significant terms, including quantity, price, and the approximate timing of the transaction.

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This supplemental facility matured on June 30, 2021 and was not renewed.

In December 2019, we amended our ABL facility to reflect current banking regulatory requirements, which did not have a financial impact.

In September 2019, we amended the Term Loan Facility to provide for an incremental aggregate principal amount of $125.0 million and used the proceeds to repay $115.0 million of outstanding borrowings under the ABL Facility.

In June 2019, we reallocated AUD 5.0 million from the term loan commitment to the interchangeable commitment of the Australia Senior Secured Credit Facility.

As of December 31, 2022, we were in compliance with the terms of all of our Credit Facilities and the indentures governing the Senior Notes and Senior Secured Notes.

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Cash Flow from Operations

Net cash provided by operating activities decreased $180.0 million to $175.7 million in the year ended December 31, 2021 from $355.7 million in the year ended December 31, 2020.

Net cash provided by operating activities decreased $145.3 million to $30.3 million net cash used in the year ended December 31, 2022 compared to $175.7 million net cash provided in the year ended December 31, 2021.

The decrease in cash provided by operating activities was primarily due to increased working capital and decreased earnings in the current year, partially offset by non-recurrence of legal settlements paid in 2021.

Net cash provided by operating activities decreased $180.0 million to $175.7 million in the year ended December 31, 2021 compared to $355.7 million in the year ended December 31, 2020.

The decrease in cash provided by operating activities was due primarily to increased inventory costs, increased accounts receivable, cash paid for legal settlements, and increased cash taxes, partially offset by increased earnings.

Net cash provided by operating activities increased $52.9 million to $355.7 million in the year ended December 31, 2020 from $302.7 million in the year ended December 31, 2019.

The increase in cash provided by operating activities was due primarily to increases in accruals for the deferral of payroll taxes, including $20.9 million as a result of the CARES Act, which will be paid equally in 2022 and 2023, legal and environmental matters, and estimated variable compensation.

Cash Flow from Investing Activities

Net cash used in investing activities increased $10.4 million to $92.4 million in the year ended December 31, 2021 from $82.0 million in the year ended December 31, 2020 primarily due to a decrease in cash received from the sale of property, plant and equipment.

Net cash used in investing activities decreased $102.9 million to $82.0 million in the year ended December 31, 2020 from $184.9 million in the year ended December 31, 2019 primarily due to a decrease in cash used for acquisitions and a reduction in capital expenditures.

Net cash used in investing activities decreased $25.3 million to $67.0 million in the year ended December 31, 2022 compared to $92.4 million in the year ended December 31, 2021 primarily due to cash received from the recovery of cost from interest received on impaired notes of $14.0 million, an increase in cash received from the sale of property and equipment, and a reduction in capital expenditures.

Net cash used in investing activities increased $10.4 million to $92.4 million in the year ended December 31, 2021 compared to $82.0 million in the year ended December 31, 2020 primarily due to a decrease in proceeds from the sale of property, plant and equipment.

Cash Flow from Financing Activities

Net cash used in financing activities was $120.0 million in the year ended December 31, 2022 and consisted primarily of repurchases of our Common Stock of $132.0 million, partially offset by net borrowings of $12.7 million.

Net cash used in financing activities was $401.2 million in the year ended December 31, 2021 and consisted primarily of repurchases of our Common Stock of $323.7 million and net debt repayments of $86.1 million.

Net cash provided by financing activities was $207.9 million in the year ended December 31, 2020 and consisted primarily of net borrowings of $210.9 million, partially offset by repurchases of our Common Stock of $5.0 million.

Net cash used in financing activities was $6.4 million in the year ended December 31, 2019 and was comprised primarily of repurchases of our Common Stock of $20.0 million, partially offset by increased borrowings of $13.1 million.

Holding Company Status

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Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

If the fair value of the acquired assets exceeds the purchase price the difference is recorded as a bargain purchase in other (income) expense.

If the fair value of the acquired assets exceeds the purchase price the difference is recorded as a bargain purchase in other (income) expense, net.

Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.

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Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the assets.

When evaluating long-lived assets and definite lived intangible assets for potential impairment, if a triggering event is identified, we perform an impairment test by reviewing the expected undiscounted cash flows generated from the anticipated use and eventual disposition of the asset group compared to the carrying value of the asset group.

If the expected undiscounted cash flows are less than the carrying value of the asset group, then an impairment charge is required to reduce the carrying value of the asset group to fair value.

If we recognize an impairment loss, the carrying amount of the asset is adjusted to fair value based on the discounted estimated future net cash flows.

For a depreciable long-lived assets, the new cost basis will be depreciated over the remaining useful life of that asset.

For an amortizable intangible asset, the new cost basis will be amortized over the remaining useful life of the asset.

When a triggering event is identified, we perform an impairment test by reviewing the expected undiscounted cash flows generated from the anticipated use and eventual disposition of the asset group compared to the carrying value of the asset group.

If the expected undiscounted cash flows are less than the carrying value of the asset group, then we recognize an impairment loss, and the carrying amount of the asset is adjusted to fair value based on the discounted estimated future net cash flows.

For depreciable long-lived assets and an amortizable intangible asset, the new cost basis will be amortized over the remaining useful life of the asset.

Our impairment loss calculations require management to apply judgments in estimating future cash flows to determine asset fair values, including forecasting useful lives of the assets.

Goodwill is tested for impairment on an annual basis during the fourth quarter and between annual tests if indicators of potential impairment exist, using a fair-value-based approach.

Goodwill is tested for impairment on an annual basis during the fourth quarter and between annual tests if indicators of potential impairment exist.

Current accounting guidance provides an entity the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is impaired.

If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, we calculate the estimated fair value of the reporting unit.

We estimated the fair value of our reporting units using a discounted cash flow model (implied fair value measured on a non-recurring basis using level 3 inputs).

Inherent in the development of the discounted cash flow projections are assumptions and estimates derived from a review of our expected revenue and terminal growth rates, EBITDA margins, and cost of capital.

If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative goodwill impairment test using the income approach (implied fair value measured on a non-recurring basis using level 3 inputs).

Under the income approach, the fair value of a reporting unit is based on discounted cash flow analysis of management's short-term and long-term forecast of operating performance.

This analysis contains significant assumptions and estimates including revenue growth rates, expected EBITDA margins, discount rates, capital expenditures, and terminal growth rates.

Changes in assumptions or estimates used in our goodwill impairment testing could materially affect the determination of the fair value of a reporting unit, and therefore, could eliminate the excess of fair value over carrying value of a reporting unit and, in some cases, could result in impairment.

Such changes in assumptions could be caused by items such as a loss of one or more significant customers, decline in the demand for our products due to changing economic conditions, or failure to control cost increases above what can be recouped in sale price increases.

These types of changes would negatively affect our profits, revenues, and growth over the long term

and such a decline could significantly affect the fair value assessment of our reporting units and cause our goodwill to become impaired.

As of December 31, 2021, the fair value of our North America, Europe, and Australasia reporting units would have to decline by approximately 32%, 37%, and 12%, respectively, to be considered for potential impairment.

Keeping all other assumptions consistent, an increase in the discount rate of 1% would result in the fair value of a reporting unit over its carrying value of 26%, 31%, and 4% for the North America, Europe, and Australasia reporting units, respectively.

A material change in the fair value or carrying value of our Australasia reporting unit would put the reporting unit at risk of goodwill impairment.

For example, our ability to increase revenue and improve EBITDA margins are key assumptions in our projections of revenue, earnings and cash flows.

If our actual experience in future years falls significantly below our current projections, the fair value of the reporting unit could be negatively impacted.

Similarly, an increase in interest rates would lower our discounted cash flows and negatively impact the fair value of the reporting unit.

We believe our projections and assumptions are reasonable, but it is possible they could change, impacting our fair value estimate, or the carrying value could change.

We identified three reporting units for the purpose of conducting our goodwill impairment assessment:

North America, Europe and Australasia.

In determining our reporting units, we considered (i) whether an operating segment or a component of an operating segment was a business, (ii) whether discrete financial information was available, and (iii) whether the financial information is regularly reviewed by management of the operating segment.

D uring the quarter ended September 24, 2022, management identified various qualitative and quantitative factors which collectively indicated a triggering event had occurred within our North America and Europe reporting units.

These factors included the macroeconomic environment in each region including increasing interest rates, persistent inflation, and operational inefficiencies

attributable to ongoing global supply chain disruptions, the continuing geopolitical environment in Europe associated with the war in Ukraine, and foreign exchange fluctuations.

These factors have negatively impacted our business performance.

Based upon the results of our interim impairment analysis, we concluded that the carrying value of our Europe reporting unit exceeded its fair value, and we recorded a goodwill impairment charge of $54.9 million, representing a partial impairment of goodwill assigned to the Europe reporting unit.

In addition, we determined that our North America reporting unit was not impaired.

We performed our annual impairment assessment as of the beginning of our December fiscal month of 2022 using a quantitative analysis for our North American and Europe reporting units and a qualitative analysis for our Australasia reporting unit.

At the assessment date, our qualitative analysis of Australasia supported a conclusion that there is more than a 50% likelihood that the fair value of the reporting exceeds its carrying value.

Quantitatively, we determined that the fair value of our North America and Europe reporting units would have to decline by approximately 11% and 9%, respectively, to be considered for potential impairment.

Keeping all other assumptions consistent, an increase in the discount rate of 1% would result in the fair value of a reporting unit over its carrying value of 2% for our North American reporting unit and would result in the carrying value exceeding fair value by 2% for our Europe reporting units.

Income taxes are accounted for under the asset and liability method.

39 unchanged sentences

The expected dividend yield rate is 0% which is consistent with the expected dividends to be paid on common stock.

For stock options granted, we prepare the valuations with the assistance of a third-party valuation firm, utilizing approaches and methodologies consistent with the AICPA Practice Aid.

For PSUs issued prior to 2021, the number of PSUs that vest is determined by a payout factor consisting of equally weighted performance measures of Adjusted EBITDA and free cash flow, each as reported over the applicable three-year performance period and is adjusted based upon a market condition measured by our relative total shareholder return (“TSR”) over the applicable three-year performance period as compared to the TSR of the Russell 3000 index.

For PSUs issued in 2021, the number of PSUs that vest is determined by a payout factor consisting of equally weighted pre-set three year performance targets on return on invested capital (“ROIC”) and TSR.

For PSUs issued in 2021 and thereafter, the number of PSUs that vest is determined by a payout factor consisting of equally weighted pre-set three year performance targets on return on invested capital (“ROIC”) and TSR.

The fair value of the award is estimated using a Monte Carlo simulation approach in a risk-neutral framework to model future stock price movements based on historical volatility, risk free rates of return, and correlation matrix.

13 unchanged sentences

Lowering the discount rate by 0.25% would increase the U.S.

pension and post-retirement obligation at December 31, 2021 by approximately $14.9 million and would decrease estimated fiscal year 2022 pension income by approximately $1.7 million.

pension and post-retirement obligation at December 31, 2022 by approximately $8.9 million, however the estimated fiscal year 2023 pension expense would remain unchanged.

Increasing the discount rate by 0.25% would decrease the U.S.

pension and post-retirement obligation at December 31, 2021 by approximately $14.2 million and would increase estimated fiscal year 2022 pension income by approximately $0.7 million.

pension and post-retirement obligation at December 31, 2022 by approximately $8.5 million and would decrease estimated fiscal year 2023 pension expense by approximately $0.1 million.

We determine the expected long-term rate of return on plan assets based on the plan assets’ historical long-term investment performance, current asset allocation, and estimates of future long-term returns by asset class.

3 unchanged sentences

Capital Expenditures

We expect that the majority of our capital expenditures will be focused on supporting our cost reduction and efficiency improvement projects, certain growth initiatives, and to a lesser extent, on sustaining our current manufacturing operations.

We expect that our capital expenditures will be focused on supporting our cost reduction and efficiency improvement projects sustaining our current manufacturing operations.

We are subject to health, safety, and environmental regulations that may require us to make capital expenditures to ensure our facilities are compliant with those various regulations .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis