JELD-WEN Holding, Inc. 10-K

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations This MD&A contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in Item 1 - Business and Item 1A - Risk Factors in this Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under Item 1A- Risk Factors and included elsewhere in this Form 10-K. This MD&A is a supplement to our financial statements and notes thereto included elsewhere in this Form 10-K and is provided to enhance your understanding of our results of operations and financial condition. Our discussion of results of operations is presented in millions throughout the MD&A and due to rounding may not sum or calculate precisely to the totals and percentages provided in the tables. Our MD&A is organized as follows: • Company Overview. This section provides a general description of our Company and reportable segments, business and industry trends, our key business strategies and background information on other matters discussed in this MD&A. • Consolidated Results of Operations and Operating Results by Business Segment. This section provides our analysis and outlook for the significant line items on our consolidated statements of operations, as well as other information that we deem meaningful to an understanding of our results of operations on both a consolidated basis and a business segment basis. • Liquidity and Capital Resources. This section contains an overview of our financing arrangements and provides an analysis of trends and uncertainties affecting liquidity, cash requirements for our business, and sources and uses of our cash. • Critical Accounting Policies and Estimates. This section discusses the accounting policies that we consider important to the evaluation and reporting of our financial condition and results of operations, and whose application requires significant judgments or a complex estimation process. Company Overview We are a leading global designer, manufacturer, and distributor of high performance interior and exterior doors, windows, and related building products, serving the new construction and R&R sectors. We operate manufacturing and distribution facilities in 15 countries, located primarily in North America and Europe. For many product lines, our manufacturing processes are vertically integrated, enhancing our range of capabilities, our ability to innovate, and our quality control as well as providing supply chain, transportation, and working capital savings. Business Segments Our business is organized in geographic regions to ensure integration across operations serving common end markets and customers. We have two reportable segments: North America and Europe. Financial information related to our business segments can be found in Note 14 - Segment Information of our financial statements included elsewhere in this Form 10-K. Divestitures During 2021, the Company ceased the appeal process for its litigation with Steves & Sons, Inc. (“Steves”). 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. We have reclassified certain assets and liabilities to assets held for sale in the accompanying financial statements. We plan to continue reporting Towanda within our North America operations until the divestiture is finalized. For additional information on the Steves litigation and divestiture, see Note 25 - Commitments and Contingencies of our financial statements included elsewhere in this Form 10-K. On April 17, 2023, we entered into a Share Sale Agreement with Aristotle Holding III Pty Limited, a subsidiary of Platinum Equity Advisors, LLC, to sell our Australasia business. On July 2, 2023, we completed the sale. The net assets and operations of the disposal group met the criteria to be classified as “discontinued operations” and are reported as such in all periods presented unless otherwise noted. The consolidated statements of cash flows include cash flows from discontinued operations through the divestiture date of July 2, 2023. See Note 2 - Discontinued Operations of our financial statements included elsewhere in this Form 10-K. 37 Back to top Factors and Trends Affecting Our Business Components of Net Revenues The key components of our net revenues include Core 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. Product Demand General business, financial market, and economic conditions globally and in the regions where we operate influence overall demand in our end markets and for our products. In particular, the following factors may have a direct impact on demand for our products in the countries and regions where our products are marketed and sold: • the strength of the economy; • employment rates, consumer confidence, and spending rates; • the availability and cost of credit; • interest rate fluctuations (including mortgage and credit card interest rates) and the availability of financing for our customers and consumers; • the amount and type of residential and non-residential construction; • housing sales and home values; • the age of existing home stock, home vacancy rates, and foreclosures; • volatility in both debt and equity capital markets; • increases in the cost of raw materials or any shortage in supplies or labor, including as a result of tariffs or other trade restrictions; • the effects of governmental regulation and initiatives to manage economic conditions; • geographical shifts in population and other changes in demographics; and • 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. We believe we can enhance demand for our new and existing products by: • 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 curriculum, in-field training and technologies to facilitate remote learning; and • implementing channel initiatives to enhance our relationships with key channel partners and customers, including optimizing growth through rebate programs in North America. Product Pricing and Volume/Mix 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 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. 38 Back to top 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; • increasing rigor and alignment around capital expenditures with a clear linkage to our strategy and optimizing returns; • reducing or minimizing increases in material usage and costs through value-added engineering; • investing in logistics optimization programs to reduce freight costs and increase throughput; • redesigning our supply chain network to reduce lead times and optimize inventory levels to increase cash flow; and • reducing warranty costs by improving quality. We continue to implement our strategic cost-reduction and productivity initiatives 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 Commodities such as wood, steel, glass, fiberglass, aluminum and vinyl are major components in the production of our products. Changes in the underlying prices of these commodities have a direct impact on the cost of goods sold. While we attempt to pass on a substantial portion of such cost increases to our customers, we may not be successful in doing so. In addition, our results of operations for individual quarters may be negatively impacted by a delay between the time of raw material cost increases and a corresponding price increase. Conversely, our results of operations for individual quarters may be positively impacted by a delay between the time of a raw material price decrease and a corresponding competitive pricing decrease. Freight Costs We incur substantial freight and duty costs to third party logistics providers and port authorities to transport raw materials and work-in-process inventory to our manufacturing facilities and to deliver finished goods to our customers. 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 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; however, we may not realize the intended results within the intended timeframe. Working Capital and Seasonality Working capital 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 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. Global supply markets and supply chains have been impacted by certain events, resulting in shortages and extended lead times impacting our operations and profitability. We continue to apply a number of different strategies to mitigate the impact of these challenges on our operations, including extending our demand planning, seeking alternative sources, utilizing substitute products and leveraging our supplier relationships. Foreign Currency Exchange Rates We report our consolidated financial results in U.S. dollars. Due to our international operations, the weakening or strengthening of foreign currencies against the U.S. dollar can affect our reported operating results and our cash flows as we translate our foreign subsidiaries’ financial statements from their reporting currencies into U.S. dollars. 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. 39 Back to top Components of our Operating Results Net Revenues Our net revenues are a function of sales volumes and selling prices, each of which is a function of product mix, and consist primarily of: • 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 both 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 in North America; and • other sales, including sales of trim board, glass, hardware and locks, door skins, window screens, and miscellaneous installation and other services. We also sell molded door skins to certain customers pursuant to long-term contracts, and these customers in turn use the molded door skins to manufacture interior doors and compete directly against us in the marketplace. 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, repair and maintenance, depreciation, utility, rent and warranty expenses, outbound freight, insurance and benefits, supervision and tax expenses. Material Costs. The single largest component of cost of sales is material costs, which include raw materials, components, and finished goods purchased for use in manufacturing our products or for resale. Our most significant material costs include wood, wood composites, wood components, steel, glass, internally produced door skins, fiberglass compound, hardware, petroleum-based products such as resin and binders, as well as aluminum and vinyl extrusions. 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. Material costs also include purchased finished goods. We have and may continue to experience inflation in our material costs, including increased costs for inbound freight, due to supply chain challenges from economic and geopolitical uncertainties, including the ongoing conflict between Russia and Ukraine. The imposition of new tariffs on imports, new trade restrictions, or changes in tariff rates or trade restrictions may further impact material costs. See Item 7A - Quantitative and Qualitative Disclosures About Market Risk- Raw Materials Risk. Direct Labor and Benefit Costs. Direct labor and benefit costs reflect a combination of production hours, average headcount, general wage levels, payroll taxes, and benefits provided to employees. Direct labor and benefit costs include wages, overtime, payroll taxes, and benefits paid to hourly employees at our facilities that are involved in the production and/or distribution of our products. These costs are generally managed by each facility and headcount is adjusted according to overall and seasonal production demand. We run multi-shift operations in many of our facilities to maximize return on assets and utilization. Direct labor and benefit costs fluctuate with headcount, but generally tend to increase with inflation due to increases in wages and health benefit costs. Repair and Maintenance, Depreciation, Utility, Rent, and Warranty Expenses. • Repairs and maintenance costs consist of equipment and facility maintenance expenses, purchases of maintenance supplies, and the labor costs involved in performing maintenance on our equipment and facilities. • Depreciation includes depreciation expense associated with our production assets and plants. • Rent is predominantly comprised of lease costs for facilities we do not own as well as vehicle fleet and equipment lease costs. Facility leases are typically multi-year and may include increases tied to certain measures of inflation. • Warranty expenses represent all costs related to servicing warranty claims and product issues and are mostly related to our window and door products sold in the U.S. and Canada. Outbound Freight. Outbound freight includes payments to third-party carriers for shipments of orders to our customers, as well as driver, vehicle, and fuel expenses when we deliver orders to customers. The majority of our products are shipped by third-party carriers. Insurance and Benefits, Supervision, and Tax Expenses. • Insurance and benefit costs are the expenses relating to our insurance programs, health benefits, retirement benefit programs (including the pension plan), and other benefits for employees that are not included in direct labor and benefits costs. 40 Back to top • Supervision costs are the wages and bonus expenses related to plant managers. Both insurance and benefits and supervision expenses tend to be influenced by headcount and wage levels. • Tax costs are mostly payroll taxes for employees not included in direct labor and benefit costs, and property taxes. Tax expenses are impacted by changes in tax rates, headcount and wage levels, and the number and value of properties owned. In addition, an appropriate portion of each of the insurance and benefits, supervision and tax expenses are allocated to SG&A expenses. Selling, General, and Administrative Expenses SG&A expenses consist primarily of research and development, sales and marketing, and general and administrative expenses. Research and Development . Research and development expenses consist primarily of personnel expenses related to research and development, consulting and contractor expenses, tooling and prototype materials, and overhead costs allocated to such expenses. Substantially all of our research and development expenses are related to developing new products and services and improving our existing products and services. 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. Sales and Marketing. Sales and marketing expenses consist primarily of advertising and marketing promotions of our products and services and related personnel expenses, as well as sales incentives, trade show and event costs, sponsorship costs, consulting and contractor expenses, travel, display expenses, and related amortization. Sales and marketing expenses are generally variable expenses. 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. Goodwill Impairment Goodwill impairment consists of goodwill impairment charges associated with our Europe reporting unit in the year ended December 31, 2022. For more information, refer to Note 6 - Goodwill of our consolidated financial statements included in this Form 10-K. Restructuring and Asset Related Charges 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 related facility using the effective interest method. For additional details, see Note 12 - Long-Term Debt of our financial statements for the year ended December 31, 2023 included elsewhere in this Form 10-K . Other Income, Net Other income, net, includes income and losses related to various miscellaneous non-operating expenses. For more information, refer to Note 22 - Other Income, Net of our consolidated financial statements included in this Form 10-K . Income Taxes 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 41 Back to top or settled. 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. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. For more information, refer to Note 15 - Income Taxes to our consolidated financial statements included in this Form 10-K. Results of Operations The tables in this section summarize key components of our results of operations for the periods indicated, both in U.S. dollars and as a percentage of our net revenues. Certain percentages presented in this section have been rounded to the nearest whole number. Accordingly, totals may not equal the sum of the line items in the tables below. We present several financial metrics in “Core” terms, such as Core Revenue, which excludes the impact of foreign exchange, acquisitions and divestitures completed in the last twelve months. We believe Core Revenue assists management, investors, and analysts in understanding the organic performance of our operations. Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022 Year Ended December 31, 2023 December 31, 2022 (amounts in thousands) % of Net Revenues % of Net Revenues Net revenues $ 4,304,334 100.0 % $ 4,543,808 100.0 % Cost of sales 3,471,713 80.7 % 3,757,888 82.7 % Gross margin 832,621 19.3 % 785,920 17.3 % Selling, general and administrative 655,280 15.2 % 654,077 14.4 % Goodwill impairment — — % 54,885 1.2 % Restructuring and asset related charges 35,741 0.8 % 17,622 0.4 % Operating income 141,600 3.3 % 59,336 1.3 % Interest expense, net 72,258 1.7 % 82,505 1.8 % Loss on extinguishment of debt 6,487 0.2 % — — % Other income, net (25,719) (0.6) % (53,433) (1.2) % Income from continuing operations before taxes 88,574 2.1 % 30,264 0.7 % Income tax expense 63,339 1.5 % 18,041 0.4 % Income from continuing operations, net of tax 25,235 0.6 % 12,223 0.3 % Gain on sale of discontinued operations, net of tax 15,699 0.4 % — — % Income from discontinued operations, net of tax 21,511 0.5 % 33,504 0.7 % Net income $ 62,445 1.5 % $ 45,727 1.0 % Consolidated Results Net Revenues – Net revenues decreased $239.5 million, or 5.3%, to $4,304.3 million in the year ended December 31, 2023 from $4,543.8 million in the year ended December 31, 2022. The decrease was driven by a decrease in Core Revenues of 5% and a nominal impact from foreign exchange. Core Revenues decreased 5% due to a 10% decrease in volume/mix, partially offset by a 5% benefit from price realization. Gross Margin – Gross margin increased $46.7 million, or 5.9%, to $832.6 million in the year ended December 31, 2023 from $785.9 million in the year ended December 31, 2022. Gross margin as a percentage of net revenues was 19.3% in the year ended December 31, 2023 and 17.3% in the year ended December 31, 2022. The increase in gross margin percentage was due primarily to favorable price/cost, partially offset by accelerated depreciation in North America from reviews of equipment capacity optimization. SG&A Expense – SG&A expense increased $1.2 million, or 0.2%, to $655.3 million in the year ended December 31, 2023 from $654.1 million in the year ended December 31, 2022. SG&A expense as a percentage of net revenues increased to 15.2% in the year ended December 31, 2023 from 14.4% in the year ended December 31, 2022. The increase in SG&A expense was primarily due to increased performance-based variable compensation expenses and accelerated amortization of an ERP system that we intend to not utilize upon completion of the JW Australia Transition Services Agreement period, partially offset by decreased labor expenses driven by a reduction in headcount and lower bad debt expense in our North America segment due to improved collections. 42 Back to top Goodwill Impairment – Goodwill impairment charges of $54.9 million in the year ended December 31, 2022 relate to goodwill impairment charges in our Europe reporting unit. For further information, refer to Note 6 - Goodwill of our consolidated financial statements included in this Form 10-K. Restructuring and Asset Related Charges – Restructuring and asset related charges of $35.7 million in the year ended December 31, 2023 increased 102.8% from $17.6 million in the year ended December 31, 2022. The increase in restructuring charges was primarily due to an increase in charges incurred to close certain manufacturing facilities in our North America segment. For more information, refer to Note 19 - Restructuring and Asset Related Charges of our consolidated financial statements included in this Form 10-K. Interest Expense, Net – Interest expense, net, decreased $10.2 million, or 12.4%, to $72.3 million in the year ended December 31, 2023 from $82.5 million in the year ended December 31, 2022. The decrease was primarily due to higher interest income from interest rate derivatives, the redemption of our Senior Secured Notes and partial redemption of our Senior Notes, and decreased borrowings on our Revolving Credit Facilities during the year ended December 31, 2023, partially offset by an increase to the cost of borrowing on our variable rate Term Loan Facility. Loss on Extinguishment of Debt – The $6.5 million loss on extinguishment of debt is related to the redemption of our Senior Secured Notes and partial redemption of our Senior Notes during the year ended December 31, 2023. Refer to Note 12 - Long-Term Debt of our consolidated financial statements included in this Form 10-K. Other Income, Net – Other income, net decreased $27.7 million, or 51.9%, to $25.7 million in the year ended December 31, 2023 from $53.4 million in the year ended December 31, 2022. Other income, net in the year ended December 31, 2023 primarily consisted of recovery of the JW Australia transition services costs incurred of $8.3 million, income from the refund of deposits from antidumping duties of $7.0 million, an ERC from the U.S. government of $6.1 million, recovery of cost from interest received on impaired notes of $3.5 million, and income from short-term investments and forward contracts related to the JW Australia divestiture of $3.1 million, partially offset by pension expense of $6.5 million and a $4.3 million settlement loss associated with our U.S. defined benefit pension plan. Other income, net 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, reimbursements from governmental assistance and insurance of $8.0 million, pension income of $4.9 million, credit for overpayments of utility expenses of $2.0 million, and foreign currency gains of $1.0 million. Income Taxes – Income tax expense was $63.3 million and $18.0 million in the years ended December 31, 2023 and December 31, 2022, respectively. The effective tax rate in the year ended December 31, 2023 was 71.5% compared to 59.6% in the year ended December 31, 2022. The effective tax rate increased primarily due to the impacts of the $32.7 million net valuation allowance recorded in the year ended December 31, 2023, partially offset by the $54.9 million non-deductible goodwill impairment charge recorded for the year ended December 31, 2022 not recorded in the year ended December 31, 2023. For more information, refer to Note 15 - Income Taxes of our consolidated financial statements included in this Form 10-K. Gain on Sale of Discontinued Operations, net of tax – The $15.7 million gain on sale of discontinued operations, net of tax is related to the July 2, 2023 sale of JW Australia. Refer to Note 2 - Discontinued Operations of our consolidated financial statements included in this Form 10-K. 43 Back to top Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021 December 31, 2022 December 31, 2021 (dollars in thousands) % of Net Revenues % of Net Revenues Net revenues $ 4,543,808 100.0 % $ 4,181,690 100.0 % Cost of sales 3,757,888 82.7 % 3,358,773 80.3 % Gross margin 785,920 17.3 % 822,917 19.7 % Selling, general and administrative 654,077 14.4 % 604,514 14.5 % Goodwill impairment 54,885 1.2 % — — % Restructuring and asset related charges 17,622 0.4 % 2,556 0.1 % Operating income 59,336 1.3 % 215,847 5.2 % Interest expense, net 82,505 1.8 % 76,788 1.8 % Other income, net (53,433) (1.2) % (13,241) (0.3) % Loss on extinguishment of debt — — % 1,342 — % Income before taxes 30,264 0.7 % 150,958 3.6 % Income tax expense 18,041 0.4 % 19,636 0.5 % Income from continuing operations, net of tax 12,223 0.3 % 131,322 3.1 % Income from discontinued operations, net of tax 33,504 0.7 % 37,500 0.9 % Net income $ 45,727 1.0 % $ 168,822 4.0 % Consolidated Results Net Revenues – Net revenues increased $362.1 million, or 8.7%, to $4,543.8 million in the year ended December 31, 2022 from $4,181.7 million in the year ended December 31, 2021. The increase was due to an improvement in Core Revenues of 12%, partially offset by a 4% adverse impact from foreign exchange. Core Revenues increased due to a 13% benefit from price realization and unfavorable volume/mix of 1%. Gross Margin – Gross margin decreased $37.0 million, or 4.5%, to $785.9 million in the year ended December 31, 2022 from $822.9 million in the year ended December 31, 2021. Gross margin as a percentage of net revenues was 17.3% in the year ended December 31, 2022 and 19.7% in the year ended December 31, 2021. 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 $49.6 million, or 8.2%, to $654.1 million in the year ended December 31, 2022 from $604.5 million in the year ended December 31, 2021. SG&A expense as a percentage of net revenues decreased to 14.4% in the year ended December 31, 2022 from 14.5% in the year ended December 31, 2021. The increase in SG&A expense 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 for our Europe reporting unit. For further information, refer to Note 5 - Goodwill of our consolidated financial statements included in this Form 10-K. Restructuring and Asset Related Charges – Restructuring and asset related charges increased $15.1 million, or 589.4%, to $17.6 million in the year ended December 31, 2022 from $2.6 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. For more information, refer to Note 19 - Impairment and Asset Related Charges of our consolidated financial statements included in this Form 10-K. Interest Expense, Net – Interest expense, net, increased $5.7 million, or 7.4%, to $82.5 million in the year ended December 31, 2022 from $76.8 million in the year ended December 31, 2021. 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, partially offset by interest income from interest rate derivatives in the in the year ended December 31, 2022 and higher interest income earned on cash balances. Other Income, Net – Other income, net increased $40.2 million, or 303.5%, to $53.4 million in the year ended December 31, 2022 from $13.2 million in the year ended December 31, 2021. Other income, net in the year ended December 31, 2022 primarily 44 Back to top consisted of the recovery of cost from interest received on impaired notes of $14.0 million, legal settlement income of $10.5 million, reimbursements from governmental assistance and insurance of $8.0 million, pension income of $4.9 million, a credit for overpayments of utility expenses of $2.0 million, and foreign currency gains of $1.0 million. Other income, net in the year ended December 31, 2021 primarily consisted of foreign currency gains of $7.1 million and reimbursements from governmental pandemic assistance relating to COVID-19 and insurance of $3.2 million. Loss on Extinguishment of Debt – The $1.3 million loss on extinguishment of debt is related to an amendment of our Term Loan Facility during the year ended December 31, 2021. Refer to Note 12 - Long-Term Debt of our consolidated financial statements included in this Form 10-K. Income Taxes – Tax expense was $18.0 million and $19.6 million in the years ended December 31, 2022 and December 31, 2021, respectively. The effective tax rate in the year ended December 31, 2022 was 59.6% compared to 13.0% in the year ended December 31, 2021. The increase in the effective tax rate in the year ended December 31, 2022 was primarily due to the non-deductible goodwill impairment charge of $54.9 million. For more information, refer to Note 15 - Income Taxes of our consolidated financial statements included in this Form 10-K. Segment Results 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 define Adjusted EBITDA from continuing operations as income (loss) from continuing operations, net of tax, adjusted for the following items: income tax expense (benefit); depreciation and amortization; interest expense, net ; and certain special items consisting of non-recurring net legal and professional expenses and settlements; goodwill impairment; restructuring and asset related charges; other facility closure, consolidation, and related costs and adjustments; M&A related costs; net (gain) loss on sale of property and equipment; loss on extinguishment of debt; share-based compensation expense; pension settlement charges; non-cash foreign exchange transaction/translation (income) loss; and other special items. This non-GAAP financial measure should be viewed in addition to, and not as a substitute for, the Company’s reported results prepared in accordance with GAAP. We have two reportable segments in our continuing operations, organized and managed principally by geographic region: North America and Europe. We report all other business activities in Corporate and unallocated costs. Reconciliations of net income to Adjusted EBITDA from continuing operations for our segments’ operations are as follows: 45 Back to top Year Ended December 31, 2023 (amounts in thousands) North America Europe Total Operating Segments Corporate and Unallocated Costs Total Consolidated Income (loss) from continuing operations, net of tax $ 175,980 $ (3,335) $ 172,645 $ (147,410) $ 25,235 Income tax expense (benefit) (1) 79,210 44,095 123,305 (59,966) 63,339 Depreciation and amortization (2) 79,900 30,185 110,085 24,911 134,996 Interest expense, net 4,713 3,224 7,937 64,321 72,258 Special items: (3) Net legal and professional expenses and settlements 946 3,726 4,672 23,512 28,184 Restructuring and asset-related charges 29,207 5,738 34,945 796 35,741 Other facility closure, consolidation, and related costs and adjustments (5) 2,242 2,237 — 2,237 M&A related costs 759 — 759 5,816 6,575 Net loss (gain) on sale of property and equipment 1,223 (5,101) (3,878) (6,645) (10,523) Loss on extinguishment of debt — — — 6,487 6,487 Share-based compensation expense 5,121 1,890 7,011 10,466 17,477 Pension settlement charge 4,349 — 4,349 — 4,349 Non-cash foreign exchange transaction/translation (income) loss (261) 1,628 1,367 (772) 595 Other special items 1,047 (2,837) (1,790) (4,721) (6,511) Adjusted EBITDA from continuing operations $ 382,189 $ 81,455 $ 463,644 $ (83,205) $ 380,439 (1) Income tax expense in our Europe segment includes an increase in valuation allowance against net operating loss carryforwards of $30.0 million. Refer to Note 15 - Income Tax es of our consolidated financial statements for further information. (2) North America depreciation and amortization expense includes accelerated depreciation of $9.1 million from reviews of equipment capacity optimization. Corporate and unallocated depreciation and amortization expense includes software accelerated amortization of $14.1 million for an ERP system that we intend to not utilize upon completion of the JW Australia Transition Services Agreement period. (3) For the definitions of the Special items listed above, refer to Note 14 - Segment Information of our consolidated financial statements included in this Form 10-K. 46 Back to top Year Ended December 31, 2022 (amounts in thousands) North America Europe Total Operating Segments Corporate and Unallocated Costs Total Consolidated Income (loss) from continuing operations, net of tax $ 260,590 $ (50,796) $ 209,794 $ (197,571) $ 12,223 Income tax expense (1) 6,963 3,307 10,270 7,771 18,041 Depreciation and amortization 69,427 31,139 100,566 12,566 113,132 Interest expense, net 4,011 6,193 10,204 72,301 82,505 Special items: (2) Net legal and professional expenses and settlements 12 1,674 1,686 (1,973) (287) Goodwill impairment — 54,885 54,885 — 54,885 Restructuring and asset-related charges 7,338 6,042 13,380 4,242 17,622 Other facility closure, consolidation, and related costs and adjustments 2,587 16,304 18,891 — 18,891 M&A related costs 736 — 736 9,016 9,752 Net (gain) loss on sale of property and equipment (8,397) 354 (8,043) 7 (8,036) Share-based compensation expense 4,870 2,729 7,599 6,978 14,577 Non-cash foreign exchange transaction/translation loss 148 876 1,024 11,413 12,437 Other special items 4,600 1,618 6,218 (3,113) 3,105 Adjusted EBITDA from continuing operations $ 352,885 $ 74,325 $ 427,210 $ (78,363) $ 348,847 (1) Income tax expense in Corporate and unallocated costs includes the tax impact of U.S. Operations. (2) For the definitions of the Special items listed above, refer to Note 14 - Segment Information of our financial statements included in this Form 10-K. Year Ended December 31, 2021 (amounts in thousands) North America Europe Total Operating Segments Corporate and Unallocated Costs Total Consolidated Income (loss) from continuing operations, net of tax $ 255,975 $ 66,596 $ 322,571 $ (191,249) $ 131,322 Income tax expense (benefit) (1) 5,704 16,980 22,684 (3,048) 19,636 Depreciation and amortization 72,095 32,855 104,950 11,405 116,355 Interest expense, net 6,080 9,282 15,362 61,426 76,788 Special items: (2) Net legal and professional expenses and settlements 1,450 563 2,013 13,585 15,598 Restructuring and asset-related charges, net 1,200 1,453 2,653 (97) 2,556 Other facility closure, consolidation, and related costs and adjustments — 2,326 2,326 — 2,326 M&A related costs 664 375 1,039 4,167 5,206 Net loss (gain) on sale of property and equipment 1,589 584 2,173 (87) 2,086 Loss on extinguishment of debt — 1,342 1,342 Share-based compensation expense 5,472 2,096 7,568 12,420 19,988 Non-cash foreign exchange transaction/translation gain (51) (10,108) (10,159) (262) (10,421) Other special items 2,703 4,290 6,993 2,999 9,992 Adjusted EBITDA from continuing operations $ 352,881 $ 127,292 $ 480,173 $ (87,399) $ 392,774 (1) Income tax benefit in Corporate and unallocated costs includes the tax impact of U.S. Operations. (2) For the definitions of the Special items listed above, refer to Note 14 - Segment Information of our financial statements included in this Form 10-K. 47 Back to top Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022 Year Ended (amounts in thousands) December 31, 2023 December 31, 2022 Net revenues from external customers % Variance North America $ 3,123,056 $ 3,259,353 (4.2) % Europe 1,181,278 1,284,455 (8.0) % Total Consolidated $ 4,304,334 $ 4,543,808 (5.3) % Percentage of total consolidated net revenues North America 72.6 % 71.7 % Europe 27.4 % 28.3 % Total Consolidated 100.0 % 100.0 % Adjusted EBITDA from continuing operations (1) North America $ 382,189 $ 352,885 8.3 % Europe 81,455 74,325 9.6 % Corporate and unallocated costs (83,205) (78,363) 6.2 % Total Consolidated $ 380,439 $ 348,847 9.1 % Adjusted EBITDA from continuing operations as a percentage of segment net revenues North America 12.2 % 10.8 % Europe 6.9 % 5.8 % Total Consolidated 8.8 % 7.7 % (1) Adjusted EBITDA from continuing operations is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted EBITDA from continuing operations, see Note 14 - Segment Information of our financial statements included in this Form 10-K. North America Net revenues in North America decreased $136.3 million, or 4.2%, to $3,123.1 million in the year ended December 31, 2023 from $3,259.4 million in the year ended December 31, 2022. The decrease was primarily due to a decrease in Core Revenues of 4.0%. Core Revenues decreased due to an 8% unfavorable volume/mix driven by weakened market demand, partially offset by a 4% benefit from price realization. Adjusted EBITDA from continuing operations in North America increased $29.3 million to $382.2 million, or 8.3%, in the year ended December 31, 2023 from $352.9 million in the year ended December 31, 2022. The increase was primarily due to favorable price/cost and positive productivity, partially offset by unfavorable volume/mix and higher SG&A. The increase in SG&A was primarily driven by increased performance-based variable compensation and the impact of inflation on labor expenses, partially offset by a reduction in bad debt expense due to improved collections. Additionally, a decrease in other income, net, was primarily driven by net pension expense in the current period compared to gains in the same period last year, partially offset by income recognized for a refund of deposits for antidumping duties and an ERC during the year ended December 31, 2023. Europe Net revenues in Europe decreased $103.2 million, or 8.0%, to $1,181.3 million in the year ended December 31, 2023 from $1,284.5 million in the year ended December 31, 2022. The decrease was primarily due to a decrease in Core Revenues of 9%. Core Revenues decreased due to unfavorable volume/mix of 15% primarily due to market softness across the region, partially offset by a 7% benefit from price realization. Adjusted EBITDA from continuing operations in Europe increased $7.1 million, or 9.6%, to $81.5 million in the year ended December 31, 2023 from $74.3 million in the year ended December 31, 2022. The increase was primarily due to favorable productivity and positive price/cost, partially offset by unfavorable volume/mix. Corporate and unallocated costs Corporate and unallocated costs increased by $4.8 million, or 6.2%, to $83.2 million in the year ended December 31, 2023, from $78.4 million in the year ended December 31, 2022. The increase in cost is primarily due to losses on foreign exchange transactions in the current period compared to gains in the same period last year, and a reduction in the recovery of cost from interest received on impaired notes, partially offset by lower labor costs due to reduced headcount. 48 Back to top Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021 Year Ended (dollars in thousands) December 31, 2022 December 31, 2021 Net revenues from external customers % Variance North America $ 3,259,353 $ 2,829,240 15.2 % Europe 1,284,455 1,352,450 (5.0) % Total Consolidated $ 4,543,808 $ 4,181,690 8.7 % Percentage of total consolidated net revenues North America 71.7 % 67.7 % Europe 28.3 % 32.3 % Total Consolidated 100.0 % 100.0 % Adjusted EBITDA from continuing operations (1) North America $ 352,885 $ 352,881 — % Europe 74,325 127,292 (41.6) % Corporate and Unallocated costs (78,363) (87,399) (10.3) % Total Consolidated $ 348,847 $ 392,774 (11.2) % Adjusted EBITDA from continuing operations as a percentage of segment net revenues North America 10.8 % 12.5 % Europe 5.8 % 9.4 % Total Consolidated 7.7 % 9.4 % (1) Adjusted EBITDA from continuing operations is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted EBITDA from continuing operations, see Note 14 - Segment Information to our financial statements included in this Form 10-K. 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 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 from $352.9 million in the year ended December 31, 2021. While Adjusted EBITDA increased slightly primarily driven by improved volume/mix and productivity, the increase was offset by higher SG&A expenses. Europe 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 Revenues of 7%. Core Revenues increased due to a 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 lower volume/mix, higher SG&A expenses, and negative price/cost, partially offset by improved productivity. Corporate and unallocated costs Corporate and unallocated costs decreased in the year ended December 31, 2022 by $9.0 million, or 10.3%, 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 periods. 49 Back to top Liquidity and Capital Resources Overview 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 and our Senior Notes. We place a strong emphasis on cash flow generation, which includes an operating discipline focused on working capital management. 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. dollar. 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, and decreases starting in the fourth quarter as inventory levels and accounts receivable decline. Inventories fluctuate for raw materials that have long delivery lead times, as we work through prior shipments and take delivery of new orders. As of December 31, 2023, we had total liquidity (a non-GAAP measure) of $750.6 million, consisting of $288.3 million in unrestricted cash, $462.3 million available for borrowing under the ABL Facility, compared to total liquidity of $575.2 million as of December 31, 2022 (on a continuing operations basis and excluding JW Australia). The increase in total liquidity was primarily due to both higher cash balances and lower borrowings on our ABL Facility at December 31, 2023 compared to December 31, 2022. As of December 31, 2023, our cash balances, including $0.8 million of restricted cash, consisted of $72.9 million in the U.S. and $216.3 million in non-U.S. subsidiaries. The company repatriated $21.8 million and $132.8 million from non-U.S. subsidiaries during the year ended December 31, 2023 and December 31, 2022, respectively. The Company utilized cash repatriated from non-U.S. subsidiaries to repay a portion of the outstanding ABL Facility during the year ended December 31, 2022. Based on our current and forecasted level of operations and seasonality of our business, 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. We may, from time to time, refinance, reprice, extend, retire, or otherwise modify our outstanding debt to lower our interest payments, reduce our debt, or otherwise improve our financial position. These actions may include repricing amendments, extensions, and/or opportunistic refinancing of debt. The amount of debt that may be refinanced, repriced, extended, retired, or otherwise modified, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants, and other considerations. We may, from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be on such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Based on hypothetical variable rate debt that would have resulted from drawing each revolving credit facility up to the full commitment amount, a 100 basis point decrease in interest rates would have reduced our interest expense by $10.8 million in the year ended December 31, 2023. A 100 basis point increase in interest rates would have increased our interest expense by $10.8 million in the same period. In certain instances, the impact of a hypothetical decrease would have been partially mitigated by interest rate floors that apply to certain of our debt agreements. Contractual Obligations In addition to our discussion and analysis surrounding our liquidity and capital resources, we have significant contractual obligations and commitments as of December 31, 2023 relating to the following: • Long-term debt and interest obligations – As of December 31, 2023 our outstanding debt balance was $1,232.8 million. See Note 12- Long-Term Debt of 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, 2023, taking into account scheduled maturities and amortization payments. As of December 31, 2023, we estimate interest payments of $72.9 million due in 2024 and $179.6 million due in 2025 and thereafter. • Finance and operating lease obligations – As of December 31, 2023, our remaining contractual commitments for finance and operating leases was $192.7 million. See Note 8 - Leases of our consolidated financial statements for additional details regarding the timing of expected future payments. • Purchase obligations – As of December 31, 2023, we have purchase obligations of $26.7 million due in 2024 and $28.1 million due in 2025 and thereafter. These purchase obligations are primarily relating to software hosting services and equipment purchase agreements. 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. 50 Back to top Borrowings and Refinancings In July 2021, we refinanced our existing Term Loan Facility and ABL Facility by issuing replacement loans that aggregated to $550.0 million in principal amount under the Term Loan Facility and added $100.0 million in potential additional revolving loan capacity to our ABL Facility. In June 2023, we amended the Term Loan Facility to replace LIBOR with a Term SOFR based rate as the successor benchmark rate and made certain other technical amendments and related conforming changes. All other material terms and conditions were unchanged. On August 3, 2023, we redeemed all $250.0 million of our 6.25% Senior Secured Notes and $200.0 million of our 4.63% Senior Notes. The Company recognized a pre-tax loss of $6.5 million on the redemption in year ended December 31, 2023, consisting of $3.9 million in call premium and $2.6 million in accelerated amortization of debt issuance costs. In January 2024, we amended the Term Loan Facility to lower the applicable margin for replacement term loans, remove certain provisions no longer relevant to the parties, and make certain other technical amendments related to related conforming changes. Pursuant to the amendment, replacement term loans bear interest at SOFR plus a margin of 1.75% to 2.00% depending on JWI’s corporate credit ratings, compared to a margin of 2.00% to 2.25% under the previous amendment. All other material terms and conditions of the Term Loan Agreement were unchanged. As of December 31, 2023, we were in compliance with the terms of all of our Credit Facilities and the indentures governing the Senior Notes. Our results have been and will continue to be impacted by substantial changes in our net interest expense throughout the periods presented and into the future. See Note 12 - Long-Term Debt of our consolidated financial statements for additional details. Cash Flows (1) The following table summarizes the changes to our cash flows for the periods presented: Year Ended (amounts in thousands) December 31, 2023 December 31, 2022 December 31, 2021 Cash provided by (used in): Operating activities $ 345,188 $ 30,337 $ 175,666 Investing activities 279,174 (67,030) (92,361) Financing activities (563,157) (120,014) (401,209) Effect of changes in exchange rates on cash and cash equivalents 7,074 (19,315) (21,800) Net change in cash and cash equivalents $ 68,279 $ (176,022) $ (339,704) (1) C ash flow information is inclusive of cash flows from JW Australia as discontinued operations through the divestiture date of July 2, 2023. Cash Flow from Operations Net cash provided by operating activities increased $314.9 million to a $345.2 million source of cash in the year ended December 31, 2023 compared to a $30.3 million source of cash in the year ended December 31, 2022. The increase in cash provided by operating activities was primarily due to a $342.5 million improvement in net cash provided by our working capital accounts. Cash flow provided by Inventory was $193.1 million favorable compared to the year ended December 31, 2022, primarily driven by demand planning that drove lower inventory days on hand, which mitigated inflation on raw materials. Cash flow provided by Accounts receivable, net of $90.6 million was favorable in the year ended December 31, 2023 compared to the year ended December 31, 2022, which was primarily due to decreased sales, partially offset by slightly deteriorated days sales outstanding. Cash flow provided by Accounts payable was $58.8 million favorable compared to the year ended December 31, 2022, which was primarily due to lower raw material inflation on purchases in the current year as compared to prior year, partially offset by demand planning that drove moderated purchasing. Net cash provided by operating activities decreased $145.3 million to a $30.3 million source of cash in the year ended December 31, 2022 compared to a $175.7 million source of cash 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 year ended December 31, 2022, partially offset by non-recurrence of legal settlements paid in 2021. 51 Back to top Cash Flow from Investing Activities Net cash provided by (used in) investing activities improved to a $279.2 million source of cash in the year ended December 31, 2023 compared to a $67.0 million use of cash in the year ended December 31, 2022, primarily driven by $365.6 million in net proceeds (payments) related to the sale of JW Australia, partially offset by an increase in capital expenditures of $18.7 million and a decrease in cash received from the recovery of cost from interest received on impaired notes of $10.4 million. Net cash used in investing activities decreased $25.3 million to a $67.0 million use of cash in the year ended December 31, 2022 compared to a $92.4 million use of cash 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. Cash Flow from Financing Activities Net cash used in financing activities increased $443.1 million to $563.2 million in the year ended December 31, 2023 compared to $120.0 million in the year ended December 31, 2022, primarily due to net debt payments and payments of debt extinguishment costs of $561.3 million in the year ended December 31, 2023 compared to net debt borrowings of $12.7 million in the year ended December 31, 2022, partially offset by the non-recurrence of repurchases of our Common Stock of $132.0 million in the year ended December 31, 2022. Net cash used in financing activities decreased $281.2 million to $120.0 million in the year ended December 31, 2022 compared to $401.2 million in the year ended December 31, 2021, primarily due to a decrease of $191.7 million in repurchases of our Common Stock and net debt borrowings of $12.7 million in the year ended December 31, 2022, compared to net debt payments and payments of debt extinguishment cost of $86.1 million in the year ended December 31, 2021. Holding Company Status We are a holding company that conducts all of our operations through subsidiaries, and we rely on dividends or advances from our subsidiaries to fund the holding company. The majority of our operating income is derived from JWI, our main operating subsidiary. The ability of our subsidiaries to pay dividends to us is subject to applicable local law and may be limited due to the terms of other contractual arrangements, including our Credit Facilities and Senior Notes. The amount of our consolidated net assets that were available to be distributed under our Credit Facilities as of December 31, 2023 was $889.6 million. 52 Back to top Critical Accounting Policies and Estimates The following disclosure is provided to supplement the description of our accounting policies contained in Note 1 - Description of Company and Summary of Significant Accounting Policies of our consolidated financial statements. Our MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which may differ from these estimates. The following discussion highlights the estimates we believe are critical and should be read in conjunction with the consolidated financial statements included in Part II, Item 8 of this Form 10-K. Acquisitions We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. If the fair value of the acquired assets exceeds the purchase price the difference is recorded as a bargain purchase in other income, net. Such valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. As a result, during the measurement period, which may be up to one year from the acquisition date, material adjustments must be reflected in the comparative consolidated financial statements in the period in which the adjustment amount is determined. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Newly acquired entities are included in our results from the date of their respective acquisitions. Recoverability of Long-Lived and Intangible Assets Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such asset groups may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or a change in utilization of property and equipment. We group assets to test for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. 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 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. 53 Back to top Goodwill 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 less than its carrying amount. 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 is less than its carrying amount, we perform a quantitative goodwill impairment test. Prior to 2023, the estimated fair values of reporting units were derived using only an income approach (implied fair value measured on a non-recurring basis using level 3 inputs). Beginning in 2023, the estimated fair values of our reporting units were derived using a combination of income and market approaches, both of which yielded substantially equivalent indications of fair value. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of these methods provides a reasonable estimate of a reporting unit’s fair value. Fair value computed by these models is arrived at using a number of factors and inputs. There are inherent uncertainties, however, related to fair value models, the inputs, factors and our judgment in applying them to this analysis. Nonetheless, we believe that the combination of these methods provides a reasonable approach to estimate the fair values of our reporting units. Under the income approach, the fair value of a reporting unit is based on a 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 amount 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. During the year ended 2022, we identified three reporting units for the purpose of conducting our goodwill impairment assessment: North America, Europe and Australasia. After the divestiture of our Australasia reporting unit in the third quarter of 2023, we identified two reporting units: North America and Europe. 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. We performed our annual impairment assessment during the fourth quarter of 2023 using a quantitative analysis for our North America and Europe reporting units. No indication of goodwill impairment was identified. We determined that the fair value of our North America reporting unit would have to decline significantly to be considered for potential impairment. We determined the fair value of our Europe reporting unit would have to decline by approximately 3% to be considered for potential impairment. Keeping all other assumptions consistent, an increase in the discount rate of 1% would result in the carrying amount exceeding fair value by approximately 1% for our Europe reporting unit. As further described below, we recorded an impairment of goodwill for our Europe reporting unit during the third quarter of 2022. Following this partial impairment, the reporting unit’s carrying amount equaled the fair value. We believe that our Europe reporting unit is at risk of impairment in the near term if the reporting unit’s operating performance does not improve in line with management’s expectations, or if there is a change in the long-term outlook for the business or in other factors, such as the discount rate. The current goodwill impairment analysis for our Europe reporting unit incorporates mid-to-low market outlook growth assumptions and realization of certain improvement plans. During 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 conflict between Russia 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 amount 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 during the fourth quarter of 2022 and 2021 using a quantitative analysis for each of our reporting units. No indication of goodwill impairment was identified. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. 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. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate both the positive and negative evidence that is relevant in assessing whether we will realize the deferred tax assets. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not 54 Back to top be realized. This projected realization is directly related to our future projections of the performance of our business and management’s planning initiatives at any point in time. As a result, valuation allowances are subject to change as proven business trends and planning initiatives develop. The tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if the position is more likely than not to be sustained, based on the technical merits of the position and the jurisdiction. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit and the tax related to the position would be due to the entity and not the owners. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. We apply this accounting standard to all tax positions for which the statute of limitations remains open. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We file a consolidated federal income tax return in the U.S. and various states. For financial statement purposes, we calculate the provision for federal income taxes using the separate return method. Certain subsidiaries file separate tax returns in certain countries and states. Any U.S. federal, state and foreign income taxes refundable and payable are reported in other current assets and other current liabilities in the consolidated balance sheets as of December 31, 2023 and December 31, 2022. We record interest and penalties on amounts due to tax authorities as a component of income tax expense in the consolidated statements of operations. We have elected to account for the impact of GILTI in the period in which it is incurred. The Company continues to monitor and evaluate legislative developments related to the Global Anti-Base Erosion Proposal (“GloBE”) established by the Organization of Economic Cooperation and Development’s (“OECD”) Pillar Two framework. Several countries in which the Company’s subsidiaries operate have adopted those rules into legislation. The Company continues to evaluate impacts as further guidance is released. Contingent Liabilities Contingent liabilities require significant judgment in estimating potential losses for legal and environmental claims. Each quarter, we review significant new claims and litigation for the probability of an adverse outcome. Estimates are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will materially exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators, and the estimated loss can change materially as individual claims develop. Share-based Compensation Plan We have share-based compensation plans that provide for compensation to employees through various grants of share-based instruments. We apply the fair value method of accounting using the Black-Scholes option-pricing model to determine the compensation expense for stock options. The compensation expense for RSUs awarded is based on the fair value of the RSU at the date of grant. Compensation expense is recorded in the consolidated statements of operations and is recognized over the requisite service period. The determination of obligations and compensation expense requires the use of several mathematical and judgmental factors, including stock price, expected volatility, the anticipated life of the option, estimated risk-free rate, and the number of shares or share options expected to vest. Any difference in the number of shares or share options that actually vest can affect future compensation expense. Other assumptions are not revised after the original estimate. The Black-Scholes option-pricing model requires the use of weighted average assumptions for estimated expected volatility, estimated expected term of stock options, risk-free rate, estimated expected dividend yield, and the fair value of the underlying common stock at the date of grant. We estimate the expected term of all stock options based on previous history of exercises. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock option. The expected dividend yield rate is 0% which is consistent with the expected dividends to be paid on common stock. 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 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. We estimate forfeitures based on our historical analysis of actual stock option forfeitures. Actual forfeitures are recorded when incurred and estimated forfeitures are reviewed and adjusted at least annually. 55 Back to top Employee Retirement and Pension Benefits The obligations under our defined benefit pension plans are calculated using actuarial models and methods. The most critical assumption and estimate used in the actuarial calculations is the discount rate for determining the current value of benefit obligations. Other assumptions and estimates used in determining benefit obligations and plan expenses include expected return on plan assets, inflation rates, and demographic factors such as retirement age, mortality, and turnover. These assumptions and estimates are evaluated periodically and are updated accordingly to reflect our actual experience and expectations. The discount rate used to determine the benefit obligations was computed through a projected benefit cash flow model. This approach determines the discount rate as the rate that equates the present value of the cash flows (determined using that single rate) to the present value of the cash flows where each cash flows' present value is determined using the spot rates from the WTW RATE: Link 10:90 Yield Curve. The discount rate utilized to calculate the projected benefit obligation at the measurement date for our U.S. pension plan decreased to 5.05% at December 31, 2023 from 5.39% at December 31, 2022. Lowering the discount rate by 0.25% would increase the U.S. pension and post-retirement obligation at December 31, 2023 by approximately $7.2 million and would decrease estimated fiscal year 2024 pension expense by approximately $0.1 million. Increasing the discount rate by 0.25% would decrease the U.S. pension and post-retirement obligation at December 31, 2023 by approximately $6.9 million and would increase estimated fiscal year 2024 pension expense by approximately $0.3 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. Holding all other assumptions constant, a 1% increase or decrease in the assumed rate of return on plan assets would decrease or increase, respectively, 2024 net periodic pension expense by approximately $2.7 million. The actuarial assumptions we use in determining our pension benefits may differ materially from actual results because of changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions might materially affect our financial position or results of operations. Capital Expenditures 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 .