Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this Form 10-K are not guarantees of future performance and our actual results of operations, financial condition, and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in herein. In addition, even if our results of operations, financial condition, and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this Form 10-K, they may not be predictive of results or developments in future periods.
Any forward-looking statement in this Form 10-K speaks only as of the date of this Form 10-K or as of the date such statement was made.10-K. We do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Item 1 - Business.
Our Company
We are onea leading global designer, manufacturer, and distributor of the world’s largest door and window manufacturers. We design, produce, and distribute an extensive range ofhigh-performance interior and exterior doors, wood, vinyl, and aluminum windows, and related building products, for use inserving the new construction and R&R sectors.
The JELD-WEN family of residential homesbrands includes JELD-WEN worldwide; LaCantina and to a lesser extent, non-residential buildings.
We market our products globally under the JELD-WEN brand, along with several market-leading regional brands such asVPI in North America; and Swedoor, DANA, and DANAKellpex in Europe and Corinthian, Stegbar, and Trend in Australia.Europe. Our customers include wholesale distributors and retailers as well as individual contractors and consumers. As a result, ourOur business is highly diversified by distribution channel, geography, and construction application as illustrated in the charts below:
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20172023 Net Revenues $3,764$4,304 million |
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Channel | | Geography | | Construction Application(1) |
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Distribution Channel | | Geography | | Construction Application(1) |
(1)Percentage of net revenues by construction application is management’s estimate based on the end markets into which our customers sell.
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(1) | Percentage of net revenues by construction application is a management estimate based on the end markets into which our customers sell. |
As onea leading global manufacturer of the largest doorinterior and window companies in the world,exterior building products, we have invested significant capital to build a business platform that we believe is unique among our competitors. We operate 12384 manufacturing and distribution facilities in 1915 countries located primarily in North America Europe, and Australia. OurEurope. We are focused on optimizing our global manufacturing footprint is strategically sizedto enhance performance and located to meetimprove profit margins. On July 2, 2023, we completed the delivery requirementssale of our customers. Australasia business (“JW Australia”). 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. Unless otherwise indicated, the description of our business provided in Part I pertains to continuing operations only (seeNote 1 - Description of Company and Summary of Significant Accounting Policies and Note 2 - Discontinued Operationsto our consolidated financial statements for further information).
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 us with supply chain, transportation, and working capital savings. We believe that our manufacturing network allows us to deliver our broad portfolio of products to a wide range of customers across the globe, improveswhile improving our customer service and strengthensstrengthening our market positions.
Our History
We were founded in 1960 by Richard L. Wendt, when he, together with four business partners, bought a millwork plant in Oregon. The subsequent decades were a time of successful expansion and growth as we added different businesses and product categories such as interior doors, exterior steel doors, and vinyl windows. Our first overseas acquisition was Norma Doors in Spain in 1992 and since then we have acquired or established numerous businesses in Europe, Australia, Asia, Canada, and Mexico, and Chile, making usJELD-WEN a truly global company.
In October 2011, certain funds managed by affiliates of Onex acquired a majority of JELD-WEN’sthe combined voting interests. power in the Company through the acquisition of convertible debt and convertible preferred equity. After the Onex investment, we began the transformation of our business from a family-run operation to a global organization with independent, professional management. The transformation accelerated after 2013 with the hiring of a new senior management team strategically recruited from a number of world-class industrial companies. Our newcurrent management team has decades ofextensive experience driving operational improvement, innovation, and growth, both organically and through acquisitions. As of December 31, 2020, Onex owned approximately 32.6% of our outstanding shares of Common Stock. In 2021, Onex exercised its rights under its Registration Rights Agreement and requested
On February 1, 2017, we closed an IPOthe registration for resale of 28,750,000all of their shares of our common stock at aCommon Stock in multiple underwritten public offering priceofferings. During August 2021, Onex fully divested their ownership in the Company and no longer had representation on the Board of $23.00 per share. We sold 22,272,727 shares and Onex sold 6,477,273 shares from which we did not receive any proceeds. We received $472.4 million in proceeds, net of underwriting discounts, fees and commissions, from the shares sold by us. We used a portion of the net proceeds to us from the offering to repay $375 million of indebtedness outstanding under our Term Loan Facility. We will use remaining net proceeds to us for working capital and other general corporate purposes, including sales and marketing activities,
general and administrative matters, and capital expenditures. We may also use a portion of the net proceeds to invest in or acquire complementary businesses, products, services, technologies, or other assets.
On May 31, 2017, we closed a secondary public offering of 16,100,000 shares of our common stock, substantially all of which were owned by Onex, including the exercise by the underwriters of their over-allotment option that closed on June 5, 2017, at a public offering price of $30.75 per share. We did not receive any of the proceeds from the sale of the shares of common stock sold in this offering.
On November 20, 2017, we closed a secondary public offering of 14,375,000 shares of our common stock, substantially all of which were owned by Onex, including the exercise by the underwriters of their over-allotment option, at a public offering price of $33.75 per share. We did not receive any of the proceeds from the sale of the shares of common stock sold in this offering.
After completion of the IPO and the May 2017 and November 2017 secondary offerings described above, Onex owned approximately 31.2% of our outstanding common stock.
Directors.
Our Business Strategy and Operating Model
We seekstrive to achieve best-in-industry financial performance and shareholder returns through the disciplined execution of:of our strategy which includes:
operational excellence programs,•streamlining and simplifying the business, optimizing product mix, rationalizing our global footprint and strategically sourcing our raw materials to improve returns on our investments;
•enhancing performance and improving profit margins through strategic cost-reduction and productivity initiatives, such as the JEM,upgrading go-to-market processes, optimizing our sales force through training, right-sizing and consolidating our manufacturing network, investing in automation and leveraging our scale to improve our profit marginsstreamline sourcing;
•disciplined capital allocation and freeworking capital management designed to maximize shareholder returns, cash flow;flows, and return on invested capital in a balanced manner;
initiatives•sustainability-focused innovations to drive profitable organic sales growth, including new product development, investmentsrevenue growth;
•investing in our brands and marketing, channel management, and pricingcommercial excellence programs such as customer segmentation, and price optimization; and
acquisitions to expand•growing a premier performance culture led by our business.
The execution of our strategy is supportedvalues and enabled by a relentlesskeen focus on talent management. Over the long term, we believe that the implementation of our strategy is largely within our control and is less dependent on external factors. The key elements of our strategy are described further below.
Expand Our Margins and Free Cash Flow Through Operational Excellence
With 123 manufacturing facilities around the world and over 21,000 dedicated employees, we have a global manufacturing footprint that is unique in the door and window industry. We believe we have identified a substantial opportunity to improve our profitability by building a culture of operational excellence and continuous improvement across all aspects of our business through our JEM initiative. Historically, we were not centrally managed and had a limited focus on continued cost reduction, operational improvement, and strategic material sourcing. This resulted in profit margins that were lower than our building products peers and far lower than what would typically be expected of a world-class industrial company.
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 program include:
reducing labor costs, overtime, and waste by optimizing 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; and
reducing warranty costs by improving quality.
Drive Profitable Organic Sales Growth
We seek to deliver profitable organic revenue growth through several strategic initiatives, including new product development, brand and marketing investment, channel management, and continued pricing optimization. These strategic initiatives will drive our sales mix to include more value-added, higher margin products.
New Product Development: Our management team has renewed our focus on innovation and new product development. We believe that leading the market in innovation will enhance demand for our products, increase the rate at which our products are specified into home and non-residential designs, and allow us to sell a higher margin product mix.
Brand and Marketing Investment: We recently began to make meaningful investments in new marketing initiatives designed to enhance the positioning of the JELD-WEN family of brands. Our new initiatives include marketing campaigns focused on the distributor, builder, architect, and consumer communities.
Channel Management: We are implementing initiatives and investing in tools and technology to enhance our relationships with key customers, make it easier for them to source from JELD-WEN, and support their ability to sell our products in the marketplace. These incentives help our customers grow their businesses in a profitable manner while also improving our sales volumes and the margin of our product mix.
Pricing Optimization: We are focused on profitable growth and will continue to employ a strategic approach to pricing our products. Pricing discipline is an important element of our effort to improve our profit margins and earn an appropriate return on our invested capital.
Complement Core Earnings Growth With Strategic Acquisitions
Collectively, our senior management team, has acquired and integrated more than 100 companies during their careers. Leveraging this collective experience, we have developed a disciplined governance process for identifying, evaluating, and integrating acquisitions. Since 2015, we have completed ten acquisitions across North America, Europe, and Australasia. Our strategy focuses on three types of opportunities:
Market Consolidation Opportunities: The competitive landscape in several of our key markets remains highly fragmented, which creates an opportunity for us to consolidate smaller companies, enhance our market-leading positions, and realize synergies through the elimination of duplicate costs. Our recent acquisitions of Mattiovi (Finland), Dooria (Norway), Kolder (Australia), and Trend (Australia) are examples of this strategy.
Enhancing Our Portfolio of Products and Service Offerings: We strive to provide the broadest range of doors and windows to our customers so that we can enhance our share of their overall spend. Along with our organic new product development pipeline, we seek to expand our door and window product and service portfolio by acquiring companies that have developed unique products, technologies, or value-added services. Our recent acquisitions of Karona (stile and rail doors), LaCantina (folding and sliding wall systems), Aneeta (sashless windows), Breezway (louver windows), MMI Door (value-added supplier of customized door systems), and Domoferm (steel frames and doors) are examples of this strategy.
Product Adjacencies and New Geographies: Opportunities also exist to expand our company through the acquisition of complementary door and window manufacturers in new geographies as well as providers of product adjacencies. While this has not been a major focus in recent years, we expect it to be a key element in our long-term growth.
Our Products
We provide a broad portfolio of interior and exterior doors, windows, and related building products manufactured from a variety of wood, metal, and composite materials and offered across a full spectrum of price points. In the year ended December 31, 2017,2023, our door sales accounted for 67%63% of net revenues, our window sales accounted for 24%21% of net revenues, and our other ancillary products and services accounted for 9%16% of net revenues.
Doors
We are a leading global manufacturer of residential doors. We offer a full line of residential interior and exterior door products, including patio doors and folding or sliding wall systems. Our non-residential door product offering is concentrated in Europe, where we are a leading non-residential door provider by net revenues in Germany, Austria, Switzerland, and Scandinavia. In order toWe also offer non-residential doors across North America in certain markets. To meet the style, design, durability, and durability needsenergy efficiency requirements of our customers, across a broad range of price points, our product portfolio encompasses many types of materials, including wood veneer, composite wood, steel, glass, and fiberglass. Our interior and exterior residential door models generally retail at prices rangingfiberglass that satisfy a range of price points from $30entry-level to $40 for our most basic products to several thousand dollars for our high-end exterior doors.high-end. Our highest volume products include molded interior doors, which are made from two composite molded door skins joined by a wooden frame and filled with a hollow honey-cell core or other solid core materials. These low-costvalue doors are the most popular choice for interior residential applications in North America, and also are prevalent in France and the U.K. In the U.S., we manufacture exterior doors primarily made from fiberglass and steel. Our fiberglass product line has grown in popularity due to its attractive thermal properties, aesthetics, and durability. We have dedicated additional resources to our exterior fiberglass door business, which includes door slabs and door systems, and believe we have a leading product offering based on quality, breadth of design options, and range of price points. We also manufacturer stile and rail doors in our U.S. manufacturing facilities. In Europe, we also sell highly engineeredhigh performance residential and non-residential doors, with features such as soundproofing, fire resistance, radiation resistance, security, and added security. We alsoin Scandinavia we design and manufacture stiledoors which can withstand extreme environmental conditions in coastal and rail doors in our Southeast Asia manufacturing facilities, as well as in the U.S. through our 2015 acquisition of Karona. In the U.S., our 2015 acquisition of LaCantina added a line of folding and sliding wall systems to our product offerings.arctic environments. Additionally, we offer profitable value-added distribution services for residential and non-residential products in all of our markets, including customizable configuration services, specialized component options, and multiple finishing options. These services are valued by labor constrained customers and allow us to capture more profit from the sale of our door products. In the U.S., our recent acquisitionacquisitions of ABS and MMI Door is an exampleare examples of our increased focus on value-added services. Our newest door product offering includes steel doors, steel door frames, and fire doors for commercial and residential markets through our recent acquisition of Domoferm, which closed in February 2018.
We manufacture our own composite molded skins for our interior door business. In the last several years, we have added significant door skin capacity into the North America market, primarily as a result of the opening of our facility in Dodson, Louisiana.
Windows
We are a leading global manufacturer of residential windows.windows in North America. We manufacture a full line of residential wood, vinyl, and aluminumwood composite windows in North America, wood and aluminum windows in Australia, and wood windows in the U.K.America. Our window product lines comprise a full range of styles, features, and energy-saving options in order to meet the varied needs of our customers in each of our regional end markets. For example, our high performancehigh-performance wood and vinyl windows with multi-pane glazing and superior energy efficiency properties are in greater demand in Canada and the northern U.S. By contrast,In addition, our lower-cost aluminum framedvalue windows are popular in somewith production builders and the remodel and replacement markets. In select coastal regions, of the southern U.S., while in coastal Florida certain local building codes requirewe offer impact windows that can withstand the impact of debris propelled by hurricane-force winds. Woodhurricane force winds and satisfy local building codes. Our wood windows areremain prevalent as a high-end option in all of our markets because they possess both insulating qualities and the beauty of natural wood. In North America, our wood windows and patio doors include our proprietary AuraLast treatment, which is a unique water-based wood protection process that provides protection against wood rot and decay. We believe AuraLast is unique in its
ability to penetrate and protect the wood through to the core, as opposed to being a shallow or surface-only treatment. Our newest window product offerings include sashless window systems through our 2015With the acquisition of AneetaLaCantina Doors, the Company added LaCantina’s innovative folding, multi-slide, and louver windowswing patio doors and wall systems through our 2016to its already robust windows product offering. We also offer a non-residential line of vinyl windows for a broad assortment of commercial applications. With the acquisition of Breezway. OurVPI, we added vinyl windows typically retail at prices ranging from $100for mid-rise, multi-family, institutional, hospitality, and commercial properties to $200 for a basic vinyl window to over $1,000 for a custom energy-efficient wood window.our product lineup. We believe that our innovative energy-efficient windows position us to benefit from increasing environmental awareness among consumers and from changes in local building codes. In recognition of our expansive energy-efficient product line, we have been an ENERGY STAR partner since 1998. We have received ENERGY STAR Canada’s Excellence Award in 2023 and have won 7 ENERGY STAR Canada Manufacturer of the Year Awards.
Other Ancillary Products and Services
In certain regions, we sell a variety of other products that are ancillary to our door and window offerings, which we do not classify as door or window sales. These products include shower enclosures and wardrobes, moldings, trim board, lumber, cutstock, glass, staircases, hardware and locks, cabinets, and window screens. Molded door skins sold to certain third-party manufacturers, as well as miscellaneous installation and other services, areWe also included in this category.
We 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. Miscellaneous installation and other services are also included in this category.
Our Segments
We operate within the global market for residential and non-residential doors and windows with sales spanning 81approximately 71 countries. While we operate globally, the markets for doors and windows are regionally distinct with suppliers manufacturing finished goods in proximity to their customers. Finished doors and windows are generally bulky, expensive to ship, and, in the case of windows, fragile. Designs and specifications of doors and windows also vary from country to country due to differing construction methods, building codes, certification requirements, and consumer preferences. Customers also demand short delivery times and can require special order customizations. We believe that we are well-positioned to meet the global demands of our customers due to our market leadership, strong brands, broad product line, and strategically located manufacturing and distribution facilities.
Our operations are managed and reported in threetwo reportable segments, organized and managed principally by geographic region. Our reportable segments are North America Europe and Australasia.Europe. We report all other business activities in Corporate and unallocated costs. Factors considered in determining the threetwo reportable segments include the nature of business activities, the management structure accountable directly to the CODM for operating and administrative activities, the discrete financial information available, and the information regularly presented toreviewed by the CODM.
North America
In our North America segment, we compete primarily in the new construction and R&R market for residential doors and windows in the U.S. and Canada. We are the only manufacturer that offers a full line of interior and exterior door and window products, allowing us to offer a more complete solution to our customer base. We believe thatWhile we expect to realize some benefit from share gains and continued growth from pricing strategies to offset inflation, our leading position in the North American market will enable usis expected to benefit fromcontinue to face headwinds during 2024 primarily due to heightened interest rates and continued recovery in residential construction activity over the next several years.labor inflation. We believe that our total market opportunity in North America also includeswill continue to include non-residential applications and other related building products, and value-added services.products.
Europe
The European market for doors is highly fragmented, and we have the only platform in the industry capable of serving nearly all European countries. In our Europe segment, we compete primarily in the market for residential and non-residential doors in Germany, the U.K., France, Austria, Switzerland, and Scandinavia. We believeDuring 2024, we expect headwinds in our residential and non-residential markets due to general economic weakness and as interest rates that our total market opportunity in Europe also includes other European countries, other door product lines, related building products, and value-added services. Although
construction activity in Europe has been slower to recover compared to construction activity in North America, new construction and R&R activity isare expected to increase across Europe over the next several years.remain high.
Australasia
In our Australasia segment, we compete primarily in the market for residential doors and windows in Australia, where we hold a leading position by net revenues. We believe that our total market opportunity in the Australasia region also includes non-residential applications and other countries in the region, as well as other related building products, and value-added services. For example, we also sell a full line of shower enclosures and closet systems throughout Australia.
Financial information regarding our segments is included in Note 1914 - Segment Information to our financial statements included in this Form 10-K.
Materials
Historically our sourcing function operated primarily in a regional, decentralized model. With our recent leadership transformation, we have increased our focus on making global sourcing a competitive advantage, as evidenced by our hiring in early 2016 of an experienced procurement executive to lead our global sourcing function. Under his leadership, our focus has been and will continue be on minimizing material costs through strategic global sourcing and value-added re-engineering of components. We believe leveraging our significant spending and the global nature of our purchases will allow us to achieve these goals.
We generally maintain a diversified supply base for the materials used in our manufacturing operations. Materials represented approximately 50% of our cost of sales in the year ended December 31, 2017. The primary materials used for our door business include wood, wood veneers, wood composites, steel, glass, internally produced door skins, fiberglass compound, and hardware, as well as petroleum-based products such as resin and binders. The primary materials for our window business include wood, wood components, glass, and hardware, as well as aluminum extrusions, and vinyl extrusions. Wood components for our window operations are sourced primarily from our own manufacturing plants, which allow us to improve margins and take advantage of our proprietary technologies such as our AuraLast wood treatment process.
We track commodities in order to understand our vendors’ costs, realizing that our costs are determined by the broader competitive market as well as by increases in the inputs to our vendors. In order to manage the risk in material costs, we develop strategic relationships with suppliers, routinely evaluate substitute components, develop new products, vertically integrate, where applicable, and seek alternative sources of supply from multiple vendors and often from multiple geographies.
Seasonality
In a typical year, our operating results are impacted by seasonality. Historically, 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. Seasonal variations in operating results may be impacted by inclement weather conditions, such as cold or wet weather, which can delay construction projects.
Sales and Marketing
We actively market and sell our products directly to our customers around the world through our global sales force and indirectly through our marketing and branding initiatives.initiatives, which includes our enhanced social media presence. Our global sales force, which is organized and managed regionally, focuses on building and maintaining relationships with key customers as well as managing customer supply needs and arranging in-store promotional initiatives. In North America and Europe, we also have a dedicated teamteams that focusesfocus on our large home centerretail customers.
We have recently made significantcontinue to make investments in tools and technologies to enhance the effectiveness of our sales force and improve ease of doing business.our customers’ purchasing experience. For example, we are continuing to invest and utilize Salesforce in the process of deploying Salesforce.com on a global basis, which will provide us with a common globalNorth America and Europe to enhance our customer relationshiprelationships and support. We continue to leverage Salesforce for improved data management, platform. In addition, we are in the process of simplifying our order entry process by implementing online configuration tools. We have introduced an electronic ordering system for easy order placement,service level tracking, Ecommerce, and we intend to expand our online retail sales. Our new strategy also includes initiatives focused on expanding our market through the use of social media. To date, these initiatives have included hosting videos and increasing our presence on Facebook.
Consistent with our new pricing strategies, we have restructured the commission and incentive plans of our sales team to drive focus on achieving profitable growth.workflow enhancements. We have also invested significantlymade investments in North America to streamline and automate order management and continue to expand post sales care through our architectural sales force by adding staffvirtual OnSite Applications and toolsservice scheduling. In Europe, we have started investments in new door configuration software to increase the frequencyimprove our customer’s ordering experience with us which will enhance our products are specified by architects.digital service offering and improve our Net Promoter Score. We believe these investments will increase sales force effectiveness, create pull-through demand, and optimize sales force productivity.
We believe that our broad product portfolio of both doors and windows in North America and Australasia is a competitive advantage as it allows us to cross-sell our door and window products to our end customers, many of whom find it more efficient to choose one supplier for their door and window needs on a given project. None of our primary competitors in these regions offers a similarly complete range of windows as well as interior and exterior doors.
Research and Development
Following a number of years during and after the global financial crisis of limited investment in new product development, a A core elementaspect of our business strategy is a renewed focus onthe investment and innovation and the development of new products and technologies. We believe that leading the market in innovation will enhance demand for our products and allow us to sell a higher margin product mix. Our research and development efforts encompass development of new product development,products and material inputs, derivative product development, as well as value addedvalue-added re-engineering of components in our existing products leading to reduced costs and manufacturing efficiencies. We have also designed a new governance process that prioritizes the most impactful projects, andwhich is expected to improve the efficiency and quality of our research and development efforts. The governance process is currently being deployed globally, such that we can leverage best practices from region to region. Additionally, a substantial driver of our acquisition activity has been increasing access to new and innovative products.
Although product specifications and certifications vary from country to country, the global nature of our operations allows us to leverage our global innovation capabilities and create product platforms which enable us to share new product designs across our markets. We believe that the global nature of our research and development capabilities is unique among our door and window competition. An example of global sharing of innovation is the “soft close” door system, which is based on hardware originally designed and manufactured by our European operations that is now being offered in North America and Australia. Additionally, we have successfully launched new door designs into our North American and Australian markets that were originally developed in our European operations.
Customers
We sell our products worldwide and have well-established relationships with numerous customers throughout the door and window distribution chain in each of our end markets, including retail home centers, wholesale distributors, and building product dealers that supply homebuilders, contractors, and consumers. Our wholesale customers include such industry leaders as BMC/Stock Building Supply, ProBuild/Builders First Source, American Building Supply, Saint-Gobain, and the Holzring group. Our home center customers include, among others, The Home Depot, Lowes,Lowe’s Companies, and Menards in North America; and B&Q, Howdens, and Bauhaus in Europe; and Bunnings Warehouse in Australia.Europe. We have maintained relationships with the majority of our top ten customers for over 1925 years and believe that the strength and tenure of our customer relationships is based on the total value we provide, including the quality and breadth of our ability to produceproduct offering, our customer service, innovation, and deliver high-quality products quickly and in the desired volumes for a reasonable cost.delivery capabilities. Our top ten customers together accounted for approximately 36%43%, 44% and 43% of our net revenues in the yearyears ended December 31, 2017,2023, 2022 and our largest customer,2021, respectively. The Home Depot, accounted for approximatelya customer of our North America segment, represents 15%, 16%, and 17% of our consolidated net revenues induring the yearyears ended December 31, 2017.2023, 2022, 2021, respectively. Lowe’s Companies, another customer of our North America segment, represents 11%, 11%, and 10% of our consolidated net revenues during the years ended December 31, 2023, 2022, 2021, respectively.
Competition
The door and window industry is highly competitive and includes a number of regional and international competitors. Competition is largely based on the functional and aesthetic quality of products, service quality, distribution capability, and price. We believe that we are well-positioned in our industry due to our leading brands, our broad product lines, our consistently high product quality and service, our global manufacturing and distribution capabilities, and our extensive multi-channel distribution. For North American interior doors, our major competitors include Masonite, Steves & Sons, Inc. and several smaller independent door manufacturers. For North American exterior doors, competitors include Masonite, Therma-Tru (a division of Fortune Brands), Plastpro and Plastpro.Steves & Sons, Inc. The North American window market is highly fragmented, with sizable competitors including Anderson,Andersen, Pella, Marvin, Ply-Gem (a division of Cornerstone Building Brands, formerly NCI Building Systems), and Milgard (a division of Masco)MI Windows and Doors). The door manufacturers that we primarily compete with in our European markets include Huga, Prüm/Garant (a division of Arbonia Group), Viljandi, Masonite, Keyor, Herholz, and Herholz. The competitive landscape in Australia is varied across the door and window markets. In the Australian door market, Hume Doors is our primary competitor, while in the window, shower screen, and wardrobe markets we largely compete against a fragmented set of smaller companies.Hormann.
Intellectual Property
We rely primarily on patent, trademark, copyright, and trade secret laws and contractual commitments to protect our intellectual property and other proprietary rights. Generally, registered trademarks have a perpetual life, provided that they are renewed on a timely basis and continue to be used properly as trademarks. We intend to maintain the trademark registrations listed below so long as they remain valuable to our business.
Our U.S. window and door trademarks include JELD-WEN®, AuraLast®, MiraTEC®, Extira®, LaCANTINA Karona, ImpactGard, JW, Aurora,®, MMI Door®, KaronaTM, ImpactGard®, JW®, Aurora®, IWP®, True BLU®, ABSTM, Siteline®, National Door®, Low-Friction Glider®, Hydrolock®, VPITM, AURALINE®, FINISHIELD®, MILLENNIUM®,TRUFIT®, EPICVUE®, and IWP.EVELIN®. Our trademarks are either registered or have long been used as a common law trademarktrademarks by the
Company.us. The trademarks we use outside the U.S. include the Stegbar, Regency, William Russell Doors, Airlite, Trend, The Perfect Fit, Aneeta, Breezway, Kolder, Swedoor®, Dooria®, DANA®, MattioviTM, Zargag® , Alupan®, Domoferm®, Kellpax®,and CorinthianHSE™ marks in Australia,Europe.
Environmental, Social, and Swedoor, Dooria, DANA, MattioviGovernance Matters
Human Capital Management
We believe that the success of our mission is realized by the engagement and Alupanempowerment of our employees and we are committed to investing in Europe.
Employeesour people. Our senior leadership team, including our Chief Executive Officer and our Executive Vice President, Chief Human Resources Officer, is responsible for developing and executing our human capital strategy. This includes the attraction, retention, development, and engagement of talent. In addition, our Executive Vice President, Chief Human Resources Officer regularly updates senior management and our Board of Directors on the operation and status of our human capital management.
As of December 31, 2017,2023, we employed approximately 21,00017,700 people. Of our total number of employees, approximately 10,90011,000 are employed in operations included in our North America segment and corporate operations, and approximately 6,0006,700 are employed in operations included in our Europe segment, and approximately 4,100 are employed in operations included in our Australasia segment.
In total, approximately 1,020,1,200, or 10%11%, of our employees in the U.S. and Canada are unionized. Two facilities in the U.S., representing approximately 420350 employees, are covered by collective bargaining agreements. In Canada, approximately 47%68% of our employees work at facilities covered by collective bargaining agreements. As is common in Europe, and Australia, the majority of our facilities are covered by work councils and/or labor agreements. We believe we have satisfactory relationships with our employees and our organized labor unions.
Environmental MattersHealth and Safety
The geographic breadthWe strive to operate in a way that prioritizes the health and safety of our facilitiesemployees, business partners, and the nature of our operations subject uscommunities in which we operate. JELD-WEN's commitment to extensivethe environmental health and safety laws(“EH&S”) of our associates is foundational and regulationsembedded in jurisdictions throughoutour values. Our EH&S programs are designed around global policies and standards and a commitment to complying with or exceeding applicable requirements within our manufacturing, service and install, and headquarter operations. We proactively implement management systems consistent with ISO 14001 and 45001 requirements to prevent EH&S risks and to create a strong safety culture and improve performance. We are committed to continuous improvement and continue to measure, refine, and improve on our performance. We educate and train our employees to help ensure compliance with our policies, standards, and management systems. We also have policies and procedures in place to encourage employees to stop work to address at-risk conditions without the world. Such lawsthreat of retaliation. Our management and regulations relate to, among other things, air emissions, the treatment and dischargeBoard of wastewater, the discharge of hazardous materials into the environment, the handling, storage, use and disposal of solid, hazardous and other wastes, workerDirectors also periodically review our health and safety or otherwise relatepractices to health, safety,address ongoing effectiveness and protectioncompliance.
Diversity, Equity, and Inclusion (DE&I)
We believe that a diverse and engaged workforce is a strong competitive advantage and we strive to create an environment where individuals of the environment. Many of our productsall backgrounds can fully contribute and maximize their potential. Our employees are also subjectencouraged to various laws and regulations such as building and construction codes, product safety regulations, and regulations and mandates related to energy efficiency.
The nature of our operations, which involve the handling, storage, use, and disposal of hazardous wastes, exposes usbring their authentic selves to the riskworkplace and work together to enrich a culture of liabilityinclusivity and claims associated with contamination at our current and former facilities or sites where we have disposed of or arranged for the disposal of waste, or with the impact of our products on human health and safety and the environment. Laws and regulations with respect to the investigation and remediation of contaminated sites can impose joint and several liability for releases or threatened releases of hazardous materials upon statutorily defined parties, including us, regardless of fault or the lawfulness of the original activity or disposal. We have been subject to claims, including having been named as a potentially responsible party, in certain proceedings initiated pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, and similar state and foreign laws, regulations, and statutes, and may be named a potentially responsible party in other similar proceedings in the future. Unforeseen expenditures or liabilities may arise in connection with such matters.
We have also been the subject of certain environmental regulatory actions by the EPA and state regulatory agencies in the U.S. and foreign governmental authorities in jurisdictions in which we operate, and are obligated to make certain expenditures in settlement of those actions. We do not expect expenditures for compliance with environmental laws and regulations to have a material adverse effect on our results of operations or competitive position. However, the discovery of a presently unknown environmental condition, changes in environmental requirements orbelonging. Senior leadership teams review their enforcement, or other unanticipated events, may give rise to unforeseen expenditures and liabilities which could be material.
For more information, see Item 1A - Risk Factors - We may be subject to significant compliance costssuccession plans, as well as liabilities under environmental,their broader workforce demographics, on a regular cadence to ensure underrepresented groups are being offered fair consideration for open roles and internal promotions. As part of our recruitment process, we recruit from historically black colleges and universities, partner with affinity groups, and work with minority owned recruiting firms to help ensure managers are presented with diverse candidate pools for their workforce needs. As part of our human capital strategy, we incorporate mentoring programs, support employee resources groups, and facilitate DE&I training sessions to encourage and promote an inclusive culture.
TrainingandTalentDevelopment
We strive to not only attract and retain great talent but are committed to the continued development of our workforce. We invest in formal leadership development programs that help prepare senior leaders for succession into executive roles, in regional programs to accelerate the leadership conversion of mid-level managers, and in focused efforts to upskill our front-line leaders. Retaining and developing early career talent is an additional focus. Across our teams, we welcome apprenticeship and work study arrangements that seed talent into manufacturing and team lead roles. In North America specifically, we offer a summer internship program and a multi-year, cross-functional rotational program to identify, attract, and accelerate the growth of an internal pipeline of future managers. In our regions, we seek out, seed, and utilize financial grants and social educational investment requirements to reinvest in the ongoing learning and development needs of our diverse global workforce.
Internal job opportunities are posted for employees to review and our internal mobility philosophy encourages employees to apply for roles after they have passed twelve months on a job. As part of the annual performance management process, managers and employees meet to review goals and performance and discuss actions for ongoing growth and development. The Company continues to invest in its employees through new global learning platforms, content libraries, and additional formal and informal training programs.
Organizational Health
We manage and measure our organizational health with a view to gaining insight into our employees’ experiences, levels of workplace satisfaction, and safety lawsfeelings of engagement within the Company. Organizational health is driven through an “enterprise-guided” approach that includes both global and regulations, Item 1A - Risk Factors - Risks Relatinglocal initiatives in line with the Company’s overall cultural vision and strategy. We measure organizational health annually through our global employee survey and strive to Our Businesscontinually develop our culture and Industry, Item 1A - Risk Factors -We may be subjectemployee engagement. Results of the annual survey are communicated as global themes across the Company, with managers sharing more detailed insights from their areas of the business directly with their teams. The senior leadership team demonstrates their commitment to significant compliance costs with respect to legislativeengagement through transparent communications in town halls and regulatory proposals to restrict emissions of GHGs, and Item 3 - Legal Proceedings - Environmental Regulatory Actions.leadership team meetings; they also carry cultural targets on their individual annual goal plans.
Environmental Sustainability
We strive to conduct our business in a manner that is environmentally sustainable and demonstrates environmental stewardship. Toward that end, we pursue processes that are designed to minimize waste, maximize efficient utilization of materials, and conserve resources, including using recycled and reused materials to produce portions of our products. We are taking steps to mitigate climate change by measuring and reducing our GHG emissions, implementing renewable energy solutions and pursuing efficiency projects. We offer a variety of products that contain pre-consumer recycled content, such as our vinyl windows, aluminum cladding, and window glass. In January 2023, we launched a new primer formula developed by our coatings division designed to decrease volatile organic compounds (“VOC”) emissions in coatings applied to interior door skins. Our U.S. produced pine wood windows and select patio doors and door frames are made from AuraLast® pine, which is a proprietary, water-based wood protection process that results in a decrease of VOCs released during production. In addition, we manufacture many products that meet local green building provisions and top nationally recognized environmental programs. We continue to evaluate and modify our manufacturing and other processes on an ongoing basis to further reduce our impact on the environment. We believe it is important for our employees to share our commitment and we strive to recruit, educate, and train our employees in these values on an ongoing basis throughout their careers with us.
Environmental Regulatory Actions
The geographic breadth of our facilities and the nature of our operations subject us to extensive environmental, health, and safety laws and regulations in jurisdictions throughout the world. Such laws and regulations relate to, among other things, air emissions, the treatment and discharge of wastewater, the discharge of hazardous materials into the environment, the handling, storage, use and disposal of solid, hazardous and other wastes, worker health and safety, or otherwise relate to health, safety, and protection of the environment. Many of our products are also subject to various laws and regulations, such as building and construction codes, product safety regulations, and regulations and mandates related to energy efficiency.
The nature of our operations, which involve the handling, storage, use, and disposal of hazardous wastes, exposes us to the risk of liability and claims associated with contamination at our current and former facilities or sites where we have disposed of or
arranged for the disposal of waste, or with the impact of our products on human health and safety and the environment. Laws and regulations with respect to the investigation and remediation of contaminated sites can impose joint and several liability for releases or threatened releases of hazardous materials upon statutorily defined parties, including us, regardless of fault or the lawfulness of the original activity or disposal. We have been subject to claims, including having been named as a potentially responsible party, in certain proceedings initiated pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and similar state and foreign laws, regulations, and statutes, and may be named a potentially responsible party in other similar proceedings in the future. Unforeseen expenditures or liabilities may arise in connection with such matters.
We have also been the subject of certain environmental regulatory actions by the EPA and state regulatory agencies in the U.S. and foreign governmental authorities in jurisdictions in which we operate and are obligated to make certain expenditures in settlement of those actions. We do not expect expenditures for compliance with environmental laws and regulations to have a material adverse effect on our financial position or competitive position. However, the discovery of a presently unknown environmental condition, changes in environmental requirements or their enforcement, or other unanticipated events, may give rise to unforeseen expenditures and liabilities which could be material.
In 2007, we were identified by the WADOE as a PLP with respect to our former manufacturing site in Everett, Washington. In 2008, we entered into an Agreed Order with the WADOE to assess historic environmental contamination and remediation feasibility at our former manufacturing site in Everett, Washington.the site. As part of this agreement,the order, we also agreed to develop a CAP, arising from the feasibility assessment. We are currently workingIn December 2020, we submitted to the WADOE a draft feasibility assessment with an array of remedial alternatives, which we considered substantially complete. During 2021, several comment rounds were completed as well as the identification of the Port of Everett and W&W Everett Investment LLC as additional PLPs, with respect to this matter with each PLP being jointly and severally liable for the cleanup costs. The WADOE received the final feasibility assessment on December 31, 2021, containing various remedial alternatives with its preferred remedial alternatives totaling $23.4 million. Based on this study, we have determined our range of possible outcomes to be $11.8 million to $33.4 million. On March 1, 2022, we delivered a draft CAP consistent with the preferred alternatives which was approved by WADOE in August 2023. The existing Agreed Order of 2008 was also modified with WADOE in July 2023 to finalize our RI/FS, and, once final, we will developsupport the CAP. We estimate the remaining cost to complete our RI/FS and develop the CAP at $0.5 million, which we have fully accrued.
However, because we cannot at this time reasonably estimate the cost associated with any remedial action we would be required to undertake, we have not provided accruals for any remedial actions in our consolidated financial statements. Non-Core Everett LLC, our subsidiary, also received notice of a natural resource damage claim from the Port Gardner and Snohomish River Trustee Council in connection with this site. In September 2015, we entered into a settlement agreement, which has now been memorialized in a formal Consent Decree, pursuant to which we will pay $1.3 million to settle the claim. Of the $1.3 million, the prior insurance carrier for the site has agreed to fund $1.1 milliondevelopment of the settlement. All amounts related toassociated CAP investigation, sampling and design components. We have made provisions within our financial statements within the settlement are fully accruedrange of possible outcomes; however, the contents and we do not expect to incur any significant further loss related tocost of the settlementfinal CAP and allocation of this matter. However, should extensive remedial action be required in the future (and if insurance coverage is unavailable or inadequate),responsibility between the costs associated with this siteidentified PLPs could have a material adverse effect onvary materially from our results of operations and cash flows.estimates.
In 2015,December 2020, we entered into a COA with the PaDEP to remove a pile of wood fiber waste from our site in Towanda, Pennsylvania, which we acquired in connection with our acquisition of CMI in 2013,2012, by using it as fuel for a boiler at that site. The COA replaced a 19952018 Consent Decree between CMI’s predecessor Masonite, Inc.PaDEP and PaDEP.us. Under the COA, we are required to achieve certain periodic removal objectives and ultimately remove the entire pile by August 31, 2022. There are currently $11.02025. As of December 31, 2023 and December, 31, 2022 there was $1.4 million and $2.3 million, respectively in bonds posted in connection with these obligations. If we are unable to remove this pile by August 31, 2022,2025, then the bonds will be forfeited, and we may be subject to penalties by PaDEP. We currently anticipate meeting all applicable removal deadlines;deadlines; however, if our operations at this site decrease and we burn less fuel than currently anticipated, we may not be able to meet such deadlines.
For more information regarding the risks associated with environmental, health, and safety laws and regulations, see Item 1A - Risk Factors.
Government Regulation
As a public company with global operations, we are subject to the laws and regulations of the United States and multiple foreign jurisdictions. These regulations, which differ among jurisdictions, include those related to financial and other disclosures, accounting standards, corporate governance, intellectual property, tax, trade, antitrust, employment, privacy, and anti-corruption, in addition to the environmental laws and regulations described above.
For a more detailed description of the various laws and regulations that affect our business, see Item 1A - Risk Factors.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are filed with the SEC. We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on our website at investors.jeld-wen.com when such reports are made available and on the SEC’s website. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SECwebsite at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.
Executive Officers of the Registrant
Set forth below is certain information about our executive officers. Ages are as of February 20, 2024. There are no family relationships among the following executive officers.
Julie C. Albrecht,Executive Vice President and Chief Financial Officer. Ms. Albrecht, age 56, joined the Company as Executive Vice President and Chief Financial Officer in July 2022. Previously, Ms. Albrecht joined Sonoco Products Company in 2017 as Vice President, Treasurer / Assistant Chief Financial Officer before being named Vice President, Chief Financial Officer in which role she served until June 2022. Prior to Sonoco, Ms. Albrecht served as Vice President, Finance, Investor Relations and Treasurer for Esterline Technologies Corporation (acquired by TransDigm in 2019). She began her finance career at PricewaterhouseCoopers. Ms. Albrecht earned a bachelor’s degree in accounting from Wake Forest University.
Peggie Bolan, Vice President and General Manager, North America Building Products and Fiber. Ms. Bolan, age 52, joined the Company in October 2012 as Vice President and General Manager, North American Building Products and Fiber. She is a seasoned executive with experience in sales, marketing and operations. She earned a bachelor’s degree in English from Vanderbilt University.
William J. Christensen,Chief Executive Officer and Director. Mr. Christensen, age 51, joined the Company in April 2022 as Executive Vice President and President, Europe. In December 2022, he was appointed to his current role as Chief Executive Officer and Director of the Company. Prior to joining the Company, Mr. Christensen was Chief Executive Officer and Group Executive Board Chair of REHAU AG, a Swiss-based global manufacturer, from 2018 to 2021. Prior to his appointment as Chief Executive Officer in 2018, Mr. Christensen served as its Chief Marketing Officer. Prior to joining REHAU AG, Mr. Christensen was Chief Executive Officer of AFG Holding, a Swiss-based global building products manufacturer from 2014 to 2015. In addition, he spent ten years at Geberit International AG, a global plumbing manufacturer, in several executive roles including Group Executive Board Member and Head of International Sales, as well as President and Chief Executive Officer of The Chicago Faucets Company. He also served in various finance and business development roles at J.P. Morgan Securities and Rieter Automotive Systems. Mr. Christensen earned a bachelor’s degree in economics from Rollins College and an MBA from the University of Chicago’s Booth School of Business.
James S. Hayes,Executive Vice President, General Counsel and Corporate Secretary. Mr. Hayes, age 51, joined the Company in August 2018 as Vice President, Deputy General Counsel. In August 2022, he was promoted to Senior Vice President, Deputy General Counsel and Corporate Secretary. He was appointed to his current role in June 2023. Mr. Hayes leads the global legal team, providing legal advice and guidance to the Board of Directors and the senior leadership team. Mr. Hayes earned a bachelor’s degree in English and history from Emory University and a law degree from Villanova University School of Law.
Daniel Jacobs,Vice President and General Manager, North America Windows. Mr. Jacobs, age 38, joined the Company in September 2008 as a Sales Representative and was promoted to Sales Manager in 2010. He has held roles of increasing responsibility as a National Account Manager and Director of National Accounts from 2010 to 2016. In December 2016, Mr. Jacobs was promoted to Director of Product Management. He was promoted to Vice President and General Manager, Exterior Doors in June 2020 until May 2022 and was promoted to his current role in May 2022. Mr. Jacobs earned a bachelor’s degree in economics from Rollins College.
Michael Leon,Senior Vice President and Chief Accounting Officer. Mr. Leon, age 43, joined the Company as Senior Vice President and Chief Accounting Officer in March 2023. Prior to joining the Company, Mr. Leon was the Chief Accounting Officer and Corporate Controller at Sealed Air, a global provider of packaging solutions, from June 2018 to March 2023, where he was also the Assistant Corporate Controller from December 2014 to June 2018. Mr. Leon earned a master’s degree in accounting from the University of South Carolina.
Kevin C. Lilly, Executive Vice President, Global Transformation. Mr. Lilly, age 63, joined the Company as Senior Vice President and Chief Information Officer in February 2019 and was promoted to Executive Vice President and Chief Information Officer in July 2022. Mr. Lilly served as the Company’s Interim Chief Executive Officer from August 2022 until December 2022 when he was named Executive Vice President, Global Transformation. Mr. Lilly leads the Company’s enterprise transformation initiatives and has responsibility for the global information technology organization. Prior to joining the Company, he served as Vice President of IT at Trane Technologies (formerly Ingersoll Rand) from 2011 to 2019. Previously, he was VP and Chief Information Officer for AGCO Corporation and served in a number of IT and finance positions of increasing responsibility for global companies including KPMG, Xerox, Delphi Automotive, General Motors, and EDS. Mr. Lilly earned a bachelor’s degree in business administration from Houghton College and attended the executive graduate program at the Thunderbird School of Global Management.
Wendy Livingston,Executive Vice President, Chief Human Resources Officer. Ms. Livingston, age 50, joined the Company as Executive Vice President, Chief Human Resources Officer in June 2023. Prior to joining the Company, Ms. Livingston was the Chief People Officer for Spreetail, a multinational e-commerce company, from August 2022 to June 2023 and the Senior Vice President and Chief Human Resources Officer for Harsco Corporation (now Enviri Corporation), a global environmental services company, from August 2020 to August 2022. She held leadership roles of increasing responsibility at The Boeing Company, a global aerospace company, from 1996 to 2020, including interim Senior Vice President, Human Resources in 2020 and Vice President, Corporate Human Resources from 2017 to 2020. Ms. Livingston earned a bachelor’s degree in business administration from Peru State College,
a master’s degree in human resource management from Lindenwood University and is certified by the Society for Human Resource Management.
Matthew Meier,Executive Vice President, Chief Digital and Information Officer. Mr. Meier, age 51, joined the Company as Executive Vice President, Chief Digital and Information Officer in January 2024. Previously, he was Executive Vice President, Chief Digital and Data Officer at Driven Brands Holding, Inc., an automotive services company, from October 2021 to January 2024. Prior to joining Driven Brands, Mr. Meier was employed at Whirlpool Corporation, a manufacturer of home appliances, as the Vice President, Global Technology Value Streams from 2020 to 2021 and as Vice President, Chief Information Officer from 2016 to 2020. Mr. Meier earned a bachelor’s degree in industrial engineering from Purdue University, a master’s degree in information systems management from Carnegie Mellon University and an MBA from the Massachusetts Institute of Technology Sloan School of Management.
Daniel Valenti,Executive Vice President and General Manager, North America Doors & Distribution. Mr. Valenti, age 46, joined the Company as Executive Vice President and General Manager, North America Doors & Distribution in January 2024. Previously, Mr. Valenti was employed at Whirlpool Corporation, a manufacturer of home appliances, as the Senior Vice President and General Manager, KitchenAid Small Appliances from September 2018 to December 2023. Mr. Valenti earned a bachelor’s degree in business administration from the University of North Carolina at Chapel Hill.
Gustavo Vianna,Executive Vice President and President, Europe. Mr. Vianna, age 55, joined the Company as Executive Vice President and President, Europe in January 2024. Prior to joining the Company, Mr. Vianna was employed at Aliaxis Group SA, a global manufacturer of advanced fluid management solutions, as Chief Executive Officer, EMEA from November 2020 to September 2022 and as Chief Business Officer from September 2019 to November 2020. Previously, he was the Chief Executive Officer, Pipe Business for Saint-Gobain Europe du Nord, a manufacturer and distributor of construction materials, from September 2016 to February 2019. Mr. Vianna earned a bachelor’s degree in electrical engineering from Pontifical Catholic University and a master’s degree in business administration from Fundacão Getúlio Vargas.
Item 1A - Risk Factors
Investing in our common stockCommon Stock involves a high degree of risk. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial. You should carefully consider the following factors, as well as other information contained or incorporated by reference in this Annual Report on Form 10-K, before deciding to invest in shares of our common stock. TheCommon Stock. Our business, financial condition, and results of operations could be materially adversely affected by any of these risks, and the trading price of our common stockCommon Stock could decline due to any of these risks, and you may lose all or part of your investment in our common stock.Common Stock.
Risks Relating to Our Business and Industry
Negative trends in overall business, financial market and economic conditions, and/orand activity levels in our end markets may reduce demand for our products, which could have a material adverse effect on our business, financial condition, and results of operations.
Negative trends in overall business, financial market, and economic conditions globally or in the regions where we operate may reduce demand for our doors and windows, which is tied to activity levels in the R&R and new residential and non-residential construction end markets. In particular, the following factors may have a direct impact on our business in the regions where our products are marketed and sold:
•the strength of the economy;
•employment rates, and 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;
interest rate fluctuations for our customers and consumers;
•volatility in both debt and equity capital markets;
•increases in the cost of raw materials or any shortage in supplies or labor;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.patterns and extreme weather events.
Toward the end of the last decade, the global economy endured a significant recession followed by a prolonged period of moderate recovery that had a substantial negative effect on sales across our end markets. In particular, beginning in mid-2006 and continuing through late 2011, the U.S. residential and non-residential construction industry experienced one of the most severe downturns of the last 40 years.
While cyclicalitycyclicity in our new residential and non-residential construction end markets is moderated to a certain extent by R&R activity, much R&R spending is discretionary and can be deferred or postponed entirely when economic conditions are poor. We have experienced sales declines in all of our end markets during this recent economic downturn.downturns.
AlthoughUncertain economic and political conditions may make it difficult for us and our customers or suppliers to accurately forecast and plan future business activities. For example, changes to policies related to global trade and tariffs may result in uncertainty surrounding the U.S.future of the global economy which could have improved in recent years, there can be no assurance that this improvement will be sustained inan adverse impact on consumer spending as well as our input costs.
The ability of consumers to finance home construction and improvements is affected by the nearability of consumers to procure third-party financing and the interest rates available for home mortgages, credit card debt, home equity or long-term. Moreover, uncertain economic conditions continue in our Australasia segmentother lines of credit, and certain countries in our Europe segment.other sources of third-party financing. Negative business, financial market, and economic conditions, including rising inflation, interest rates and difficulty for consumers to procure financing, globally and within the industries or in the regions where we operatecompete in may materially and adversely affect demand for or costs to produce our products andwhich could have a material adverse effect on our business, financial condition, and results of operationsoperations.
A decline in our relationships with our key customers, the amount of products they purchase from us, or a decline in our key customers’ financial condition could be materially negatively impactedhave a material adverse effect on our business, financial condition, and results of operations.
Our business depends on our relationships with our key customers, which consist mainly of wholesale distributors and retail home centers. Our top ten customers together accounted for approximately 43%, 44% and 43% of our net revenues in the years ended
December 31, 2023, 2022 and 2021, respectively. The Home Depot, a customer of our North America segment, represents 15%, 16%, and 17% of our consolidated net revenues during the years ended December 31, 2023, 2022, and 2021, respectively. Lowe’s Companies, another customer of our North America segment, represents 11%, 11%, and 10% of our consolidated net revenues during the years ended December 31, 2023, 2022, and 2021, respectively. Although we have established and maintain significant long-term relationships with our key customers, we cannot assure you that all of these relationships will continue or will not diminish. We generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase products from us. Accordingly, sales from customers that have accounted for a significant portion of our sales in past periods, individually or as a result.group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. For example, certain of our large customers perform periodic line reviews to assess their product offering, which have in the past and may in the future lead to loss of business and pricing pressures. Some of our large customers may also experience economic difficulties or otherwise default on their obligations to us. Furthermore, our pricing optimization strategy, which requires maintaining pricing discipline in order to improve or maintain profit margins, has in the past and may in the future lead to the loss of certain customers, including key customers, who do not agree to our pricing terms. The loss of, or a diminution in our relationship with, any of our largest customers could lower our sales volumes and could have a material adverse effect on our business, financial condition, and results of operations.
We operate in a highly competitive business environment. Failure to compete effectively could cause us to lose market share and/or force us to reduce the prices we chargeand any decrease in demand for our products. This competitionproducts could have a material adverse effect on our business, financial condition, and results of operations.
We operate in a highly competitive business environment. Some of our competitors may have greater financial, marketing, and distribution resources and may develop stronger relationships with customers in the markets where we sell our products. Some of our competitors may be less leveraged than we are, providing them with more flexibility to invest in new facilities and processes and also making them better able to withstand adverse economic or industry conditions.
In addition, some of our competitors, regardless of their size or resources, may choose to compete in the marketplace by adopting more aggressive sales policies, including price cuts, or by devoting greater resources to the development, promotion, and sale of their products. This could result in our loss of customers and/or market share to these competitors, or being forcedwhich may cause us to reduce the prices at which we sell our products to remain competitive.
As a result of competitive bidding processes, we may have to provide pricing concessions to our significant customers in order for us to keep their business. Reduced pricing would result in lower product margins on sales to those customers. There is no guarantee that a reduction in prices would be offset by sufficient gains in market share and sales volume to those customers.
The loss of, or a reduction in orders from, any significant customers, or decreases in the prices of our products due to lower demand, could have a material adverse effect on our business, financial condition, and results of operations.
Failure to implement our strategic cost reduction and productivity initiatives could adversely impact our business, financial condition, and results of operations.
Our future financial performance depends in part on our management’s ability to successfully implement our strategic initiatives, including our productivity, cost reduction, and global footprint rationalization initiatives. We cannot guarantee the successful implementation of these initiatives and related strategies throughout the geographic regions in which we operate or that such implementation will improve our operating results. Any failure to successfully implement these initiatives and related strategies could adversely affect our business, financial condition, and results of operations, including increases in our severance and asset related charges. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.
A disruption in our operations due to natural disasters, unstable geopolitical conditions or armed conflicts could have a material adverse effect on our business, financial condition, and results of operations.
We operate facilities worldwide. We have facilities located in areas that are vulnerable to hurricanes, earthquakes, wildfires, and other natural disasters. In the event that a hurricane, earthquake, natural disaster, fire, pandemic, or other catastrophic event were to interrupt our operations for any extended period of time, it could delay shipment of merchandise to our customers, damage our reputation, or otherwise have a material adverse effect on our business, financial condition, and results of operations.
In addition, our operations may be interrupted by armed conflicts, terrorist attacks or other acts of violence or war. These attacks may directly impact our suppliers’ or customers’ physical facilities. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately have a material adverse effect on our business, financial condition, and results of operations. Political and economic instability in some regions of the world may also negatively impact the global economy and, therefore, our business. For instance, instabilities in the Middle East and the ongoing conflict between Russia and Ukraine, including sanctions imposed on Russia, has had and could continue to have an adverse impact on our business, such as shortages in materials and heightened inflation on materials, freight, and other variable costs, such as utilities. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any of these events could cause consumer confidence and spending
to decrease or result in increased volatility in the worldwide financial markets. They could also result in economic recessions. Any of these occurrences could have a material adverse effect on our business, financial condition, and results of operations.
We may not identify or effectively respond to consumer needs, expectations, or trends in a timely fashion, which could adversely affect our relationship with customers, our reputation, the demand for our brands, products, and services, and our market share.
The quantity, type,Our business is subject to changing consumer and prices of products demanded by consumersindustry trends, demands and our customers have shifted over time. For example, demand has increased for multi-family housing units such as apartments and condominiums, which typically require fewer of our products, and we are experiencing growth in certain channels for products with lower price points. In certain cases, these shifts have negatively impacted our sales and/or our profitability. Also,preferences that we must continually anticipate and adapt to, such as the increasing use of technology by our customers. Recent years have seen shifts in consumer preferences and purchasing practices and changes in the business models and strategies of our customers. Consumers are increasingly using the internet and mobile technology to research home improvement products and to inform and provide feedback on their purchasing and ownership experience for these products. Trends towards online purchases could impact our ability to compete as we currently sell a significant portion of our products through retail home centers, wholesale distributors, and building products dealers.
Accordingly, the success of our business depends in part on our ability to maintain strong brands and identify and respond promptly to evolving trends in demographics, consumer preferences, and expectations and needs, while also managing inventory levels. It is difficult to successfully predict the products and services our customers will demand. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to develop and introduce innovative, high-quality products and acquire or develop the intellectual
property necessary to develop new products or improve our existing products. There can be no assurance that the products we develop, even those to which we devote substantial resources, will be successful. While we continue to invest in innovation, brand building, and brand awareness, and intend to increase our investments in these areas in the future, these initiatives may not be successful. Failure to anticipate and successfully react to changing consumer preferences could have a material adverse effect on our business, financial condition, and results of operations.
In addition, our competitors could introduce new or improved products that would replace or reduce demand for our products or create new proprietary designs and/or changes in manufacturing technologies that may render our products obsolete or too expensive for efficient competition in the marketplace. Our failure to competitively respond to changing consumer and customer trends, demands, and preferences could cause us to lose market share, which could have a material adverse effect on our business, financial condition, and results of operations.
FailureManufacturing realignments and cost savings programs may result in a decrease in our short-term earnings and operating efficiency or expected benefits may not be achieved.
We continually review our manufacturing operations to maintainaddress market changes and to implement efficiencies presented by past acquisitions. Effects of periodic manufacturing integrations, realignments, and cost savings programs have in the performance, reliability, quality,past and service standards required bycould in the future result in a decrease in our customers,short-term earnings, cash flows, and operating efficiency until the expected results are achieved. Such programs may include the consolidation, integration, and upgrading of facilities, functions, systems, and procedures. Such programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or to timely deliver our products, could have a material adverse effect on our business, financial condition,obsolescence and results of operations.
If our products have performance, reliability, or quality problems, our reputation and brand equity, whichsubstantial severance costs. We also cannot assure that we believe is a substantial competitive advantage, could be materially adversely affected. We may also experience increased and unanticipated warranty and service expenses. Furthermore, we manufacture a significant portionwill achieve all of our products based on the specific requirementscost savings. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our customers,control. If these estimates and assumptions are incorrect, if we experience delays, in providingor if other unforeseen events occur, our customers the productsoperations could experience disruption, and services they specify on a timely basis could result in reduced or canceled orders and delays in the collection of accounts receivable. Additionally, claims from our customers, with or without merit, could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages that could have a material adverse effect on our business, financial condition, and results of operations.
We are in the early stages of implementing strategic initiatives, including JEM. If we fail to implement these initiatives as expected, our business, financial condition, and results of operations could be adversely affected.
Our future financial performance depends in part on our management’s ability to successfully implement our strategic initiatives, including JEM. We cannot assure you that we will be able to continue to successfully implement these initiatives and related strategies throughout the geographic regions in which we operate or be able to continue improving our operating results. Similarly, these initiatives, even if implemented in all of our geographic regions, may not produce similar results. Any failure to successfully implement these initiatives and related strategies could adversely affect our business, financial condition, and results of operations. We may, in addition, decide to alter or discontinue certain aspects of our business strategy at any time.
We may make acquisitions or investments in other businesses which may involve risks or may not be successful.
Generally, we seek to acquire businesses that broaden our existing product lines and service offerings or expand our geographic reach. There can be no assurance that we will be able to identify suitable acquisition candidates or that our acquisitions or investments in other businesses will be successful. These acquisitions or investments in other businesses may also involve risks, many of which may be unpredictable and beyond our control, and which may have a material adverse effect on our business, financial condition, and results of operations, including risks related to:
the nature of the acquired company’s business;
any acquired business not performing as well as anticipated;
the potential loss of key employees of the acquired company;
any damage to our reputation as a result of performance or customer satisfaction problems relating to an acquired business;
the failure of our due diligence procedures to detect material issues related to the acquired business, including exposure to legal claims for activities of the acquired business prior to the acquisition;
unexpected liabilities resulting from the acquisition for which we may not be adequately indemnified;
our inability to enforce indemnification and non-compete agreements;
the integration of the personnel, operations, technologies, and products of the acquired business, and establishment of internal controls, including the implementation of our enterprise resource planning system, into the acquired company’s operations;
our failure to achieve projected synergies or cost savings;
our inability to establish uniform standards, controls, procedures, and policies;
the diversion of management attention and financial resources; and
any unforeseen management and operational difficulties, particularly if we acquire assets or businesses in new foreign jurisdictions where we have little or no operational experience.
In furtherance of our strategy of growth through acquisitions, we routinely review and conduct investigations of potential acquisitions, some of which may be material. When we believe a favorable opportunity exists, we seek to enter into discussions with targets or sellers regarding the possibility of such acquisitions. At any given time, we may be in discussions with one or more counterparties. There can be no assurances that any such negotiations will lead to definitive agreements, or if such agreements are reached, that any transactions would be consummated.
Our inability to achieve the anticipated benefits of acquisitions and other investments could materially and adversely affect our business, financial condition, and results of operations.
In addition, the means by which we finance an acquisition may have a material adverse effect on our business, financial condition, and results of operations, including changes to our equity, debt, and liquidity position. If we issue convertible preferred or common stock to pay for an acquisition, the ownership percentage of our existing shareholders may be diluted. Using our existing cash may reduce our liquidity. Incurring additional debt to fund an acquisition may result in higher debt service and a requirement to comply with additional financial and other covenants, including potential restrictions on future acquisitions and distributions.
A decline in our relationships with our key customers or the amount of products they purchase from us, or a decline in our key customers’ financial condition, could have a material adverse effect on our business, financial condition, and results of operations.
Our business depends on our relationships with our key customers, which consist mainly of wholesale distributors and retail home centers. Our top ten customers together accounted for approximately 36% of our net revenues in the year ended December 31, 2017, and our largest customer, The Home Depot, accounted for approximately 17% of our net revenues in the year ended December 31, 2017. Although we have established and maintain significant long-term relationships with our key customers, we cannot assure you that all of these relationships will continue or will not diminish. We generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase products from us. Accordingly, sales from customers that have accounted for a significant portion of our sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. For example, certain of our large customers perform periodic line reviews to assess their product offering, which have in the past and may in the future lead to loss of business and pricing pressures. Some of our large customers may also experience economic difficulties or otherwise default on their obligations to us. Furthermore, our pricing optimization strategy, which requires maintaining pricing discipline in order to improve profit margins, has in the past and may in the future lead to the loss of certain customers, including key customers, who do not agree to our pricing terms. The loss of, or a diminution in our relationship with, any of our largest customers could lower our sales volumes, which could increase our costs and lower our profitability. This could have a material adverse effect on our business, financial condition, and results of operations.
Certain of our customers may expand through consolidation and internal growth, which may increase their buying power. The increased size of our customers could have a material adverse effect our business, financial condition, and results of operations.
Certain of our significant customers are large companies with strong buying power, and our customers may expand through consolidation or internal growth. Consolidation could decrease the number of potential significant customers for our products and increase our reliance on key customers. Further, the increased size of our customers could result in our customers seeking more favorable terms, including pricing, for the products that they purchase from us. Accordingly, the increased size of our customers may further limit our ability to maintain or raise prices in the future. This could have a material adverse effect our business, financial condition, and results of operations.
We are subject to the credit risk of our customers.
We are subject to the credit risk of our customers because we provide credit to our customers in the normal course of business. All of our customers are sensitive to economic changes and to the cyclical nature of the building industry. Especially during protracted or severe economic declines and cyclical downturns in the building industry, our customers may be unable to perform on their payment obligations, including their debts to us. Any failure by our customers to meet their obligations to us may have a material adverse effect on our business, financial condition, and results of operations. In addition, we may incur increased expenses related to collections in the future if we find it necessary to take legal action to enforce the contractual obligations of a significant number of our customers.
Increases in interest rates used to finance home construction and improvements, such as mortgage and credit card interest rates, and the reduced availability of financing for the purchase of new homes and home construction and improvements, could have a material adverse impact on our business, financial condition, and results of operations.
Our performance depends in part upon consumers having the ability to access third-party financing for the purchase of new homes and buildings and R&R of existing homes and other buildings. The ability of consumers to finance these purchases is affected by the interest rates available for home mortgages, credit card debt, home equity or other lines of credit, and other sources of third-party financing. Interest rates in the majority of the regions where we market and sell our products have begun to increase and are likely to continue to increase in the future. The U.S. Federal Reserve raised the federal funds rate for the first time in 10 years in December 2015 and again in each of December 2016, March 2017, June 2017 and December 2017, and is currently forecasting multiple rate increases in 2018 and 2019. Each increase in the federal funds rate or applicable central bank’s prime rates could cause an increase in future interest rates applicable to mortgages, credit card debt, and other sources of third-party financing. If interest rates continue to increase and, consequently, the ability of prospective buyers to finance purchases of new homes or home improvement products is adversely affected, our business, financial condition, and results of operations may be materially and adversely affected.
In addition to increased interest rates, the ability of consumers to procure third-party financing is impacted by such factors as new and existing home prices, unemployment levels, high mortgage delinquency and foreclosure rates, and lower housing turnover. Adverse developments affecting any of these factors could result in the imposition of more restrictive lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or R&R expenditures.
Prices of the raw materials we use to manufacture our products are subject to fluctuations, and we may be unable to pass along to our customers the effects of any price increases.
We use wood, glass, vinyl and other plastics, fiberglass and other composites, aluminum, steel and other metals, as well as hardware and other components to manufacture our products. Materials represented approximately 50% of our cost of sales in the year ended December 31, 2017. Prices for our materials fluctuate for a variety of reasons beyond our control, many of which cannot be anticipated with any degree of reliability. Our most significant raw materials include vinyl extrusions, glass, and aluminum, each of which has been subject to periods of rapid and significant fluctuations in price. The reasons for these fluctuations include, among other things, variable worldwide supply and demand across different industries, speculation in commodities futures, general economic or environmental conditions, labor costs, competition, import duties, tariffs, worldwide currency fluctuations, freight, regulatory costs, and product and process evolutions that impact demand for the same materials.
For example, an increase in oil prices may affect the direct cost of materials derived from petroleum, most particularly vinyl. As another example, many consumers demand certified sustainably harvested wood products as concerns about deforestation have become more prevalent. Certified sustainably harvested wood historically has not been as widely available as non-certified wood, which results in higher prices for sustainably harvested wood. As more consumers demand certified sustainably harvested wood, the price of such wood may increase due to limited supply.
We have short-term supply contracts with certain of our largest suppliers that limit our exposure to short term fluctuations in prices of our materials, but we are susceptible to longer-term fluctuations in prices. We generally do not hedge against commodity price fluctuations. Significant increases in the prices of raw materials for finished goods, including as a result of significant or protracted material shortages, may be difficult to pass through to customers and may negatively impact our profitability and net revenues. We may attempt to modify products that use certain raw materials, but these changes may not be successful.
Our business may be affected by delays or interruptions in the delivery of raw materials, finished goods, and certain component parts. A supply shortage or delivery chain interruption could have a material adverse effect on our business, financial condition, and results of operations.
We rely upon regular deliveries of raw materials, finished goods, and certain component parts. For certain raw materials that are used in our products, we depend on a single or limited number of suppliers for our materials, and we typically do not have long-term contracts with our suppliers. If we are not able to accurately forecast our supply needs, our limited number of suppliers may make it difficult to quickly obtain additional raw materials to respond to shifting or increased demand. In addition, a supply shortage could occur as a result of unanticipated increases in market demand, difficulties in production or delivery, financial difficulties, or catastrophic events in the supply chain. Furthermore, because our products and the components of some of our products are subject to regulation, changes to these regulations could cause delays in delivery of raw materials, finished goods, and certain component parts.
Until we can make acceptable arrangements with alternate suppliers, any interruption or disruption could impact our ability to ship orders on time and could idle some of our manufacturing capability for those products. This could result in a loss of revenues, reduced margins, and damage to our relationships with customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Our business is seasonal, and revenue and profit can vary significantly throughout the year, which may adversely impact the timing of our cash flows and limit our liquidity at certain times of the year.
Our business is seasonal, and our net revenues and operating results can vary significantly from quarter to quarter based upon the timing of the building season in our markets. Our sales typically follow seasonal new construction and R&R industry patterns. The peak season for home construction and R&R activity in the majority of the geographies where we market and sell our products generally corresponds with the second and third calendar quarters, and therefore our sales volume is typically higher during those quarters. Our first and fourth quarter sales volumes are generally lower due to reduced R&R and new construction activity as a result of less favorable climate conditions in the majority of our geographic end markets. Failure to effectively manage our inventory in anticipation of or in response to seasonal fluctuations could negatively impact our liquidity profile during certain seasonal periods.
We may be unable to protect our intellectual property, and we may face claims of intellectual property infringement.
We rely on a combination of patent, copyright, trademark, and trade secret laws, as well as confidentiality agreements, nondisclosure agreements, and other contractual commitments, to protect our intellectual property rights. However, these measures may not be adequate or sufficient, and third parties may not always respect these legal protections even if they are aware of them. In addition, our competitors may develop similar technologies and know-how without violating our intellectual property rights. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. The failure to obtain worldwide patent and trademark protection may result in other companies copying and marketing products based on our technologies or under brand or trade names similar to ours outside the jurisdictions in which we are protected. This could
impede our growth in existing regions, create confusion among consumers, and result in a greater supply of similar products that could erode prices for our protected products.
Litigation may be necessary to protect our intellectual property rights. Intellectual property litigation can result in substantial costs, could distract our management, and could impinge upon other resources. Our failure to enforce and protect our intellectual property rights may cause us to lose brand recognition and result in a decrease in sales of our products.
Moreover, while we are not aware that any of our products or brands infringes upon the proprietary rights of others, third parties may make such claims in the future. From time to time, third parties may claim that we have infringed upon their intellectual property rights and we may receive notices from such third parties asserting such claims. Any such infringement claims are thoroughly investigated and, regardless of merit, could be time-consuming and result in costly litigation or damages, undermine the exclusivity and value of our brands, decrease sales, or require us to enter into royalty or licensing agreements that may not be on acceptable terms and that could have a material adverse effect on our business, financial condition, and results of operations.
Changes in weather patterns and related extreme weather events, including as a result of global climate change, could significantly affect our financial results or financial condition.
Weather patterns may affect our operating results and our ability to maintain our sales volume throughout the year. Because our customers depend on suitable weather to engage in construction projects, increased frequency or duration of extreme weather conditions could have a material adverse effect on our financial results or financial condition. For example, unseasonably cool weather or extraordinary amounts of rainfall may decrease construction activity, thereby decreasing our sales. Also, we cannot predict the effects that global climate change may have on our business. In addition to changes in weather patterns, it might, for example, reduce the demand for construction, destroy forests (increasing the cost and reducing the availability of wood products used in construction), and increase the cost and reduce the availability of raw materials and energy. New laws and regulations related to global climate change may also increase our expenses or reduce our sales.
We are exposed to political, economic, and other risks that arise from operating a multinational business.
We have operations in North America South America, Europe, Australia, and Asia.Europe. In the year ended December 31, 2017,2023, our North America segment accounted for approximately 57%73% of net revenues and our Europe segment accounted for approximately 28%27% of net revenues, and our Australasia segment accounted for approximately 15% of our net revenues. Further, certain of our businesses obtain raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to political, economic, and other risks that are inherent in operating in numerous countries.
These risks include:
•the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
•trade protection measures and import or export licensing requirements;
•the imposition of, or increases in, tariffs or other trade restrictions;
•required compliance with a variety of foreign laws and regulations, including the application of foreign labor regulations;
•tax rates in foreign countries and the imposition of withholding requirements on foreign earnings;
•difficulty in staffing and managing widespread operations;
•the imposition of, or increases in, currency exchange controls; and
•potential inflation and interest rate fluctuation in applicable non-U.S. economies; and
changes in general economic and political conditions in countries where we operate, including as a result of the impact of the planned withdrawal of the U.K. from the E.U.economies.
The success of our business depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or ultimately on our global business, financial condition, and results of operations.
Certain of our customers may expand through consolidation and internal growth, which may increase their buying power. The notice given by the U.K.increased size of its intent to withdraw from the E.U.our customers could have a material adverse effect on our business, financial condition, and results of operations.
The recent notification by the U.K. of its intent to exit the E.U., or “Brexit”, has created volatility in the global financial markets. The terms of the withdrawal are subject to a negotiation period that could last up to two years following the formal initiation by the U.K. government of the withdrawal process in March 2017. The effects of the U.K.’s withdrawal from the E.U. on the global economy, and on our business in particular, will depend on agreements the U.K. makes to retain access to E.U. markets both during a transitional period and more permanently. Brexit could impair the abilityCertain of our operations insignificant customers are large companies with strong buying power, and our customers may expand through consolidation or internal growth. Consolidation could decrease the E.U. to transact business innumber of potential significant customers for our products and increase our reliance on key customers. Further, the future in the U.K., as well as the abilityincreased size of our U.K. operations to transact business in the future in the E.U. If the U.K. and the E.U. are unable to negotiate acceptable withdrawal terms or if other E.U. member states pursue withdrawal, barrier-free access between the U.K. and other E.U. member states or among the European Economic Area overall could be diminished or eliminated.
Volatility associated with Brexit could continue to adversely affect European and worldwide economic conditions, and may contribute to greater instability in the global financial markets. Among other things, Brexit could reduce consumer spending in the U.K. and the E.U., whichcustomers could result in decreased demandour customers seeking more favorable terms, including pricing, for the products that they purchase from us. Accordingly, the increased size of our products. Similarly, housing sales and home valuescustomers may further limit our ability to maintain or raise prices in the U.K. and in the E.U.future. This could be negatively impacted and Brexit could also influence foreign currency exchange rates. For the year ended December 31, 2017, we derived 4% of our net revenues from our operations in the U.K., and we have moved our Europe headquarters to the U.K. As a result, the effects of Brexit could inhibit the growth of our business and have a material adverse effect on our business, financial condition, and results of operations.
We are subject to the credit risk of our customers, suppliers, and other counterparties.
We are subject to the credit risk of our customers, because we provide credit to our customers in the normal course of business. Any failure by our customers to meet their obligations to us may have a material adverse effect on our business, financial
condition, and results of operations. In addition, we may incur increased expenses related to collections in the future if we find it necessary to take legal action to enforce the contractual obligations of a significant number of our customers.
Exchange rate fluctuations may impact our business, financial condition, and results of operations.
Our operations expose us to both transaction and translation exchange rate risks. In the year ended December 31, 2017, 49%2023, 34% of our net revenues came from sales outside of the U.S., and we anticipate that our operations outside of the U.S. will continue to represent a significant portion of our net revenues for the foreseeable future. In addition, the nature of our operations often requires that we incur expenses in currencies other than those in which we earn revenue. Because of the mismatch between revenues and expenses, we are exposed to significant currency exchange rate risk and we may not be successful in achieving balances in currencies throughout our operations. In addition, if the effective price of our products were to increase as a result of fluctuations in foreign currency exchange rates, demand for our products could decline, which could adversely affect our business, financial condition, and results of operations. Also, because our financial statements are presented in U.S. dollars, we must translate the financial statements of our foreign subsidiaries and affiliates into U.S. dollars at exchange rates in effect during or at the end of each reporting period, and increases or decreases in the value of the U.S. dollar against other major currencies will affect our reported financial results, including the amount of our outstanding indebtedness. Exchange rates had a positive impact of 1% on our consolidated net revenues in the year ended December 31, 2017 as compared to a 1% negative impact in the year ended December 31, 2016. We cannot assure you that fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, such as the Euro, the Australian dollar, the Canadian dollar, the British pound, or the currencies of large developing countries, would not materially adversely affect our business, financial condition, and results of operations.
A disruption in our operations due to natural disasters or acts of war could have a material adverse effect on our business, financial condition, and results of operations.
We operate facilities worldwide. Many of our facilities are located in areas that are vulnerable to hurricanes, earthquakes, and other natural disasters. In the event that a hurricane, earthquake, natural disaster, fire, or other catastrophic event were to interrupt our operations for any extended period of time, it could delay shipment of merchandise to our customers, damage our reputation, or otherwise have a material adverse effect on our business, financial condition, and results of operations.
In addition, our operations may be interrupted by terrorist attacks or other acts of violence or war. These attacks may directly impact our suppliers’ or customers’ physical facilities. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately have a material adverse effect on our business, financial condition, and results of operations. The U.S. has entered into armed conflicts, which could have an impact on our sales and our ability to deliver product to our customers. Political and economic instability in some regions of the world may also negatively impact the global economy and, therefore, our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the worldwide financial markets. They could also result in economic recessions. Any of these occurrences could have a material adverse effect on our business, financial condition, and results of operations.
Manufacturing realignments and cost savings programs may result in a decrease in our short-term earnings.
We continually review our manufacturing operations. Effects of periodic manufacturing realignments and cost savings programs have in the past and could in the future result in a decrease in our short-term earnings until the expected results are achieved. Such programs may include the consolidation, integration, and upgrading of facilities, functions, systems, and procedures. Such programs involve substantial planning, often require capital investments, and may result in charges for fixed asset impairments or obsolescence and substantial severance costs. We also cannot assure you that we will achieve all of our cost savings. Our ability to achieve cost savings and other benefits within expected time frames is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive, and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business, financial condition, and results of operations could be materially and adversely affected.
We are highly dependent on information technology, the disruption of which could significantly impede our ability to do business.
Our operations depend on our network of information technology systems, which are vulnerable to damage from hardware failure, fire, power loss, telecommunications failure, and impacts of terrorism, natural disasters, or other disasters. We rely on our information technology systems to accurately maintain books and records, record transactions, provide information to management and prepare our financial statements. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. Any damage to our information technology systems could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition, and results of operations. Periodically, these systems need to be expanded, updated, or upgraded as our business needs change. We may not be able to successfully implement changes in our information technology systems without experiencing difficulties, which could require significant financial and human resources. Moreover, our increasing dependence on technology may exacerbate this risk.
We are implementing a new Enterprise Resource Planning system as part of our ongoing technology and process improvements. If this new system proves ineffective, we may be unable to timely or accurately prepare financial reports, make payments to our suppliers and employees, or invoice and collect from our customers.
We are implementing a new ERP system as part of our ongoing technology and process improvements. This ERP system will provide a standardized method of accounting for, among other things, order entry and inventory and should enhance our ability to implement our strategic initiatives. Any delay in the implementation, or disruption in the upgrade, of this system could adversely affect our ability to timely and accurately report financial information, including the filing of our quarterly or annual reports with the SEC. Such delay or disruption could also impact our ability to timely or accurately make payments to our suppliers and employees, and could also inhibit our ability to invoice and collect from our customers. Data integrity problems or other issues may be discovered which could impact our business or financial results. In addition, we may experience periodic or prolonged disruption of our financial functions arising out of this conversion, general use of such systems, other periodic upgrades or updates, or other external factors that are outside of our control. If we encounter unforeseen problems with our financial system or related systems and infrastructure, our business, operations, and financial systems could be adversely affected. We may also need to implement additional systems or transition to other new systems that require further expenditures in order to function effectively as a public company. There can be no assurance that our implementation of additional systems or transition to new systems will be successful, or that such implementation or transition will not present unforeseen costs or demands on our management.
Our systems and IT infrastructure may be subject to security breaches and other cybersecurity incidents.
We rely on the accuracy, capacity, and security of our IT systems, some of which are managed or hosted by third parties, and the sale of our products may involve the transmission and/or storage of data, including in certain instances customers’ business and personally identifiable information. Maintaining the security of computers, computer networks, and data storage resources is a critical issue for us and our customers, as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We may face attempts by experienced hackers, cybercriminals, or others with authorized access to our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information. The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs is critical to our business. To the extent that any disruptions or security breaches result in a loss or damage to our data, it could cause harm to our reputation or brand. This could lead some customers to stop purchasing our products and reduce or delay future purchases of our products or use competing products. In addition, we could face enforcement actions by U.S. states, the U.S. federal government, or foreign governments, which could result in fines, penalties, and/or other liabilities and which may cause us to incur legal fees and costs, and/or additional costs associated with responding to the cyberattack. Increased regulation regarding cybersecurity may increase our costs of compliance, including fines and penalties, as well as costs of cybersecurity audits. Any of these actions could materially adversely
impact our business and results of operations. We do not currently have a specific insurance policy insuring us against losses caused by a cyberattack.
We have invested in industry-appropriate protections and monitoring practices for our data and information technology to reduce these risks and continue to monitor our systems on an ongoing basis for any current or potential threats. While we have not experienced any material breaches in security in our recent history, there can be no assurance that our efforts will prevent breakdowns or breaches to databases or systems that could have a material adverse effect on our business, financial condition, and results of operations.
Increases in labor costs, potential labor disputes, and work stoppages at our facilities or the facilities of our suppliers could have a material adverse effect on our business, financial condition, and results of operations.
Our financial performance is affected by the availability of qualified personnel and the cost of labor. As of December 31, 2017, we had approximately 21,000 employees worldwide, including approximately 10,300 employees in the U.S. and Canada. Approximately 1,020, or 10%, of our employees in the U.S. and Canada are unionized workers, and the majority of our workforce in other countries belong to work councils or are otherwise subject to labor agreements. U.S. and Canada employees represented by these unions are subject to collective bargaining agreements that are subject to periodic negotiation and renewal. If we are unable to enter into new, satisfactory labor agreements with our unionized employees upon expiration of their agreements, we could experience a significant disruption of our operations, which could cause us to be unable to deliver products to customers on a timely basis. Such disruptions could result in a loss of business and an increase in our operating expenses, which could reduce our net revenues and profit margins. In addition, our non-unionized labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face.
We believe many of our direct and indirect suppliers also have unionized workforces. Strikes, work stoppages, or slowdowns experienced by suppliers could result in slowdowns or closures of facilities where components of our products are manufactured or delivered. Any interruption in the production or delivery of these components could reduce sales, increase costs, and have a material adverse effect on us.
Changes in building codes and standards (including ENERGY STAR standards) could increase the cost of our products, lower the demand for our windows and doors, or otherwise adversely affect our business.
Our products and markets are subject to extensive and complex local, state, federal, and foreign statutes, ordinances, rules, and regulations. These mandates, including building design and safety and construction standards and zoning requirements, affect the cost, selection, and quality requirements of building components like windows and doors.
These regulations often provide broad discretion to governmental authorities as to the types and quality specifications of products used in new residential and non-residential construction and home renovations and improvement projects, and different governmental authorities can impose different standards. Compliance with these standards and changes in such regulations may increase the costs of manufacturing our products or may reduce the demand for certain of our products in the affected geographical areas or product markets. Conversely, a decrease in product safety standards could reduce demand for our more modern products if less expensive alternatives that did not meet higher standards became available for use in that market. All or any of these changes could have a material adverse effect on our business, financial condition, and results of operations.
In addition, in order for our products to obtain the “ENERGY STAR” certification, they must meet certain requirements set by the EPA. Changes in the energy efficiency requirements established by the EPA for the ENERGY STAR label could increase our costs, and a lapse in our ability to label our products as such or to comply with the new standards, may have a material adverse effect on our business, financial condition, and results of operations.
The elimination of the ENERGY STAR program could lower the demand for our products or otherwise adversely affect our business.
Many of our products comply with the federal government’s ENERGY STAR program. We believe that marketing our products with the ENERGY STAR label gives us a competitive advantage as compared to competing products that are not labeled as ENERGY STAR products. The current U.S. presidential administration has recently proposed discontinuing the use of the ENERGY STAR program. Eliminating the ENERGY STAR program could eliminate any competitive advantage for ENERGY STAR compliant products and result in a material adverse effect on our business, financial condition and results of operations.
Domestic and foreign governmental regulations applicable to general business operations could increase the costs of operating our business and adversely affect our business.
We are subject to a variety of regulations from U.S. federal, state, and local governments, as well as foreign governmental authorities, relating to wage requirements, employee benefits, and other workplace matters. Changes in local minimum or living wage requirements, rights of employees to unionize, healthcare regulations, and other requirements relating to employee benefits could increase our labor costs, which would in turn increase our cost of doing business. In addition, our international operations are subject to laws applicable to foreign operations, trade protection measures, foreign labor relations, differing intellectual property rights, other legal and regulatory constraints, and currency regulations of the countries or regions in which we currently operate or where we may operate in the future. These factors may restrict the sales of, or increase costs of, manufacturing and selling our products.
We may be subject to significant compliance costs as well as liabilities under environmental, health, and safety laws and regulations.
Our past and present operations, assets, and products are subject to extensive environmental laws and regulations at the federal, state, and local level worldwide. These laws regulate, among other things, air emissions, the discharge or release of materials into the environment, the handling and disposal of wastes, remediation of contaminated sites, worker health and safety, and the impact of products on human health and safety and the environment. Under certain of these laws, liability for contaminated property may be imposed on current or former owners or operators of the property or on parties that generated or arranged for waste sent to the property for disposal. Liability under these laws may be joint and several and may be imposed without regard to fault or the legality of the activity giving rise to the contamination. Notwithstanding our compliance efforts we may still face material liability, limitations on our operations, fines, or penalties for violations of environmental, health, and safety laws and regulations, including releases of regulated materials and contamination by us or previous occupants at our current or former properties or at offsite disposal locations we use.
The applicable environmental, health, and safety laws and regulations, and any changes to them or in their enforcement, may require us to make material expenditures with respect to ongoing compliance with or remediation under these laws and regulations or require that we modify our products or processes in a manner that increases our costs and/or reduces our profitability. For example, additional pollution control equipment, process changes, or other environmental control measures may be needed at some of our facilities to meet future requirements. In addition, discovery of currently unknown or unanticipated soil or groundwater conditions at our properties could result in significant liabilities and costs. Accordingly, we are unable to predict the exact future costs of compliance with or liability under environmental, health, and safety laws and regulations.
We may be subject to significant compliance costs with respect to legislative and regulatory proposals to restrict emissions of greenhouse gasses, or “GHGs”.
Various legislative, regulatory, and inter-governmental proposals to restrict emissions of GHGs, such as carbon dioxide (“CO 2”), are under consideration by governmental legislative bodies and regulators in the jurisdictions where we operate. In particular, the EPA promulgated regulations to reduce GHG emissions from new and existing power plants. The regulations applicable to existing power plants, commonly referred to as the Clean Power Plan, would require states to develop strategies to reduce GHG emissions within the states that may include reductions at other sources in addition to electric utilities. However, on October 16, 2017, the EPA published a proposed rule to repeal the Clean Power Plan. Many nations, including jurisdictions in which we operate, have also committed to limiting emissions of GHGs worldwide, most prominently through an agreement reached in Paris in December 2015 at the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change. The Paris agreement sets out a new process for achieving global GHG reductions. On June 1, 2017, President Trump announced that the U.S. plans to withdraw from the Paris agreement and to seek negotiations either to reenter the Paris Agreement on different terms or to establish a new framework agreement. The earliest permitted exit date under the Paris agreement is four years from when it took effect in November 2016, or November 2020. Since some of our manufacturing facilities operate boilers or other process equipment that emit GHGs, such regulatory and global initiatives may require us to modify our operating procedures or production levels, incur capital expenditures, change fuel sources, or take other actions that may adversely affect our financial results. However, given the high degree of uncertainty about the ultimate parameters of any such regulatory or global initiative, whether the U.S. will adhere to the Paris agreement’s exit process, and the terms on which the U.S. may reenter the Paris agreement or a separately negotiated agreement, and because proposals like the Clean Power Plan are currently subject to legal challenges and reconsideration, we cannot predict at this time the ultimate impact of such initiatives on our operations or financial results.
A significant portion of our GHG emissions are from biomass-fired boilers, which emit biogenic CO 2 . Biogenic CO 2 is generally considered carbon neutral. In November 2014, the EPA released its Framework for Assessing Biogenic CO 2 Emissions
From Stationary Sources along with an accompanying memo that generally supports carbon neutrality for biomass combustion, but left open the possibility that it may not always be characterized as carbon neutral.
Increasing regulations to reduce GHG emissions are expected to increase energy costs, increase price volatility for petroleum, and reduce petroleum production levels, which in turn could impact the prices of those raw materials. In addition, laws and regulations relating to forestry practices limit the volume and manner of harvesting timber to mitigate environmental impacts such as deforestation, soil erosion, damage to riparian areas, and GHG levels. The extent of these regulations and related compliance costs has grown in recent years and will increase our materials costs and may increase other aspects of our production costs.
Changes to legislative and regulatory policies that currently promote home ownership may have a material adverse effect on our business, financial condition, and results of operations.
Our markets are also affected by legislative and regulatory policies, such as U.S. tax rules allowing for deductions of mortgage interest and the mandate of government-sponsored entities like Freddie Mac and Fannie Mae to promote home ownership through mortgage guarantees on certain types of home loans. The Tax Act passed in the U.S. on December 22, 2017 made significant changes to some of these historical benefits of home ownership. The specific changes which could affect our markets are, among others, (i) a reduction of the maximum amount of home mortgage indebtedness for which a tax deduction for interest paid may be claimed from $1 million to $750,000, (ii) an elimination of the deduction for interest paid on home equity indebtedness, and (iii) a limitation on the amount of state and local taxes which may be deducted annually as itemized deductions which may limit certain individuals’ deduction for local property taxes. These changes to the tax code and any future policy changes may adversely impact demand for our products and have a material adverse effect on our business, financial condition, and results of operations.
Changes in legislation, regulation and government policy, including as a result of U.S. presidential and congressional elections, may have a material adverse effect on our business in the future.
The upcoming congressional elections in the U.S. could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy. While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level could significantly impact our business. Specific legislative and regulatory proposals discussed during and after the election that could have a material impact on us include, but are not limited to, infrastructure renewal programs; changes to immigration policy; modifications to international trade policy, including withdrawing from trade agreements; and changes to financial legislation and public company reporting requirements.
In addition, U.S. lawmakers have recently made substantial changes to U.S. fiscal and tax policies, including the adoption of the Tax Act. A variety of tax reforms that significantly impact U.S. taxation of multi-national corporations have recently taken effect through the passage of the Tax Act. These include, among others, reductions in the U.S. corporate tax rate, repeal of the corporate alternative minimum tax, introduction of immediate cost recovery for capital investments, the limitation of the interest deduction, the limitation of certain deductions for executive compensation and changes to the international tax system, including the adoption of a territorial tax system and taxation of the accumulated foreign earnings of U.S. multinational corporations. The specific provisions of the Tax Act, while generally favorable to our U.S. operations, may have certain negative implications which could materially impact our financial performance. In accordance with SEC guidance, we have made provisional estimates of the effects of these tax law changes on our financial statements; however, specific guidance regarding certain aspects of the legislation have yet to be issued. This guidance, once issued, will likely require amendments to these estimates in future and could result in additional charges.
Finally, there are certain aspects of the Tax Act which do not take effect until our fiscal year 2018. These include, among others, the limitation on the deduction of net interest expense, the Global Intangible Low Tax Income and Base Erosion Anti Abuse Tax, and the limitation on executive compensation. We are still studying the effects of these new provisions on our future financial results, but these provisions may have material effects on our future performance.
Lack of transparency, threat of fraud, public sector corruption, and other forms of criminal activity involving government officials increases the risk of potential liability under anti-bribery or anti-fraud legislation, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws and regulations.
We operate manufacturing facilities in 19 countries and sell our products in approximately 81 countries around the world. As a result of the international nature of our operations, we may enter from time to time into negotiations and contractual arrangements with parties affiliated with foreign governments and their officials in the ordinary course of business. In connection with these activities, we may be subject to anti-corruption laws in various jurisdictions, including the U.S. Foreign Corrupt Practices Act, or the “FCPA”, the U.K. Bribery Act and other anti-bribery laws applicable to jurisdictions where we do business
that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business, or otherwise receiving discretionary favorable treatment of any kind, and require the maintenance of internal controls to prevent such payments. In particular, we may be held liable for actions taken by agents in foreign countries where we operate, even though such parties are not always subject to our control. We have established anti-bribery policies and procedures and offer several channels for raising concerns in an effort to comply with the laws and regulations applicable to us. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these laws and regulations in every transaction in which we may engage. Any determination that we have violated the FCPA or other anti-bribery laws (whether directly or through acts of others, intentionally or through inadvertence) could result in sanctions that could have a material adverse effect on our business, financial condition, and results of operations.
As we continue to expand our business globally, including through foreign acquisitions, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside of the U.S. and our financial condition and results of operations. In addition, any acquisition of businesses with operations outside of the U.S. may exacerbate this risk.
We may be the subject of product liability claims or product recalls and we may not accurately estimate costs related to warranty claims. Expenses associated with product liability claims and lawsuits and related negative publicity or warranty claims in excess of our reserves could have a material adverse effect on our business, financial condition, and results of operations.
Our products are used in a wide variety of residential, non-residential, and architectural applications. We face the risk of exposure to product liability or other claims, including class action lawsuits, in the event our products are alleged to be defective or have resulted in harm to others or to property. We may in the future incur liability if product liability lawsuits against us are successful. Moreover, any such lawsuits, whether or not successful, could result in adverse publicity to us, which could cause our sales to decline materially. In addition, it may be necessary for us to recall defective products, which would also result in adverse publicity, as well as resulting in costs connected to the recall and loss of sales. We maintain insurance coverage to protect us against product liability claims, but that coverage may not be adequate to cover all claims that may arise, or we may not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability not covered by insurance could have a material adverse effect on our business, financial condition, and results of operations.
In addition, consistent with industry practice, we provide warranties on many of our products and we may experience costs associated with warranty claims if our products have defects in manufacture or design or they do not meet contractual specifications. We estimate our future warranty costs based on historical trends and product sales, but we may fail to accurately estimate those costs and thereby fail to establish adequate warranty reserves for them. If warranty claims exceed our estimates, it may have a material adverse effect on our business, financial condition, and results of operations.
We may make acquisitions, divestitures, or investments in other businesses, which may involve risks or may not be successful.
Generally, we may seek to acquire businesses that broaden our existing product lines and service offerings or expand our geographic reach. There can be no assurance that we will be able to identify suitable acquisition candidates or that our acquisitions or investments in other businesses will be successful. We may also seek to divest business that do not align with our goal to streamline and simplify our operations. These acquisitions or investments in other businesses may also involve risks, many of which may be unpredictable and beyond our control, and which may have a material adverse effect on our business, financial condition, and results of operations, including risks related to:
•the nature of the acquired company’s business;
•any acquired business not performing as well as anticipated;
•the potential loss of key employees of the acquired company;
•any damage to our reputation as a result of performance or customer satisfaction problems relating to an acquired business;
•the failure of our due diligence procedures to detect material issues related to the acquired business, including exposure to legal claims for activities of the acquired business prior to the acquisition;
•unexpected liabilities resulting from the acquisition for which we may not be adequately indemnified;
•our inability to enforce indemnification and non-compete agreements;
•the integration of the personnel, operations, technologies, and products of the acquired business, and establishment of internal controls, into the acquired company’s operations;
•our failure to achieve projected synergies or cost savings;
•additional stock-based compensation issued or assumed in connection with an acquisition, including the impact on stockholder dilution and our results of operations;
•our inability to establish uniform standards, controls, procedures, and policies;
•any requirement that we make divestitures of operations or properties in connection with any acquisitions;
•the diversion of management attention and financial resources;
•our inability to obtain approvals from government authorities; and
•any unforeseen management and operational difficulties, particularly if we acquire assets or businesses in new foreign jurisdictions where we have little or no operational experience.
Our inability to achieve the anticipated benefits of acquisitions and other investments could materially and adversely affect our business, financial condition, and results of operations. In addition, the means by which we finance an acquisition may have a material adverse effect on our business, financial condition, and results of operations, including changes to our equity, debt, and liquidity position. If we issue Convertible Preferred or Common Stock to pay for an acquisition, the ownership percentage of our existing shareholders may be diluted. Using our existing cash may reduce our liquidity. Incurring additional debt to fund an acquisition may result in higher debt service and a requirement to comply with additional financial and other covenants, including potential restrictions on future acquisitions and distributions.
COVID-19 has had, and may continue to have, a negative impact on the global economy and on our business, operations, and results.
While the level of disruption caused by, and the economic impact of, the COVID-19 pandemic has lessened since 2021, there is no assurance that the pandemic will not worsen again, including as a result of the emergence of new strains of the virus, or another health-related emergency will not emerge. Any worsening of the pandemic or a new health-related emergency and their effects on the economy could have an adverse impact on our business, financial condition, and results of operations.
Risks Relating to Labor and Supply Chain
Prices and availability of raw materials, freight, energy and other critical inputs we use to manufacture our products are subject to fluctuations due to inflation and other factors, and we may be unable to protectpass along to our intellectual property,customers the effects of any price increases.
As a manufacturer, our sales and weprofitability are dependent on the availability and cost of raw materials, freight, energy and other inputs. Prices and availability of our critical inputs fluctuate for a variety of reasons beyond our control, many of which cannot be anticipated with any degree of reliability. The reasons for these fluctuations include, among other things, variable worldwide supply and demand across different industries, speculation in commodities futures, general economic or environmental conditions, inflation, political unrest and instability, such as the ongoing military conflict between Russia and Ukraine and instabilities in the Middle East, labor costs, competition, import duties, tariffs, worldwide currency fluctuations, freight, regulatory costs, and product and process evolutions that impact demand for the same materials. Our most significant raw materials include logs and lumber, vinyl extrusions, glass, steel, and aluminum, each of which has been subject to periods of rapid and significant fluctuations in price. Changes in the prices of critical inputs have, and may face claimscontinue to have, a material adverse effect on our business, financial condition, and results of intellectual property infringement.operations.
We relyThe U.S. has imposed tariffs on a combination of patent, copyright, trademark, and trade secret laws,certain products imported into the U.S. from China, as well as confidentiality agreements, nondisclosure agreements,tariffs on certain steel and aluminum products imported from certain countries, and could impose additional tariffs or trade restrictions. The imposition of tariffs may impact the prices of materials purchased outside of the U.S. and include goods in transit as well as increasing the price of domestically sourced materials, including, in particular, steel and aluminum. Impositions of tariffs by other contractual commitments,countries could also impact pricing and availability of raw materials. As another example, as global demand for key chemicals increases, the limited number of suppliers and investment in greater supply capacity drives increased global pricing. Additionally, anti-dumping and countervailing duty trade cases could impact our business and results of operations. While we believe our exposure to protectthe potential increased costs of these tariffs and duties is no greater than the industry as a whole, our intellectual property rights. However,business and results of operations may be adversely affected if our efforts to mitigate their effects are unsuccessful.
We have short-term supply contracts with certain of our largest suppliers that limit our exposure to short term fluctuations in prices and availability of our materials, but we are susceptible to longer-term fluctuations in prices. Generally, we do not hedge against commodity price fluctuations, but may from time to time. Significant increases in the prices of raw materials for finished goods, including as a result of significant or protracted material shortages due to pandemic or otherwise, may be difficult to pass through to customers and may negatively impact our profitability and net revenues. We may attempt to modify products that use certain raw materials, but these measureschanges may not be adequate or sufficient,successful.
Some of our manufacturing operations require the use of substantial amounts of electricity and third partiesnatural gas, which may not always respect these legal protections even if they are aware of them. In addition, our competitors may develop similar technologies and know-how without violating our intellectual property rights. Furthermore, the laws of foreign countries may not protect our intellectual property rightsbe subject to the same extentsignificant price increases as the lawsresult of changes in overall supply and demand and the U.S.impacts of legislation and regulatory action. The failurecurrent conflict between Russia and Ukraine has, and may continue to, obtain worldwide patentaffect the price of oil and trademark protectionnatural gas throughout the world and impact the availability of energy supplies and other inputs at our manufacturing sites, particularly in Europe.
Such a disruption in the supply of natural gas could impact our ability to continue our operations at such sites at normal levels. We have taken actions in an attempt to reduce the impact of energy price increases. However, these efforts may resultbe insufficient to protect us against fluctuations in other companies copyingenergy prices or shortages of natural gas and marketing products based onwe could suffer adverse effects to net income and cash flow should we be unable to either offset or pass higher energy costs through to our technologies or under brand or trade names similar to ours outside the jurisdictions in which we are protected. This could impede our growth in existing regions, create confusion among consumers, and resultcustomers in a greater supply of similar products that could erode prices for our protected products.timely manner or at all.
LitigationOur business may be necessary to protect our intellectual property rights. Intellectual property litigation can result in substantial costs, could distract our management, and could impinge upon other resources. Our failure to enforce and protect our intellectual property rights may cause us to lose brand recognition and result in a decrease in sales of our products.
Moreover, while we are not aware that any of our productsaffected by delays or brands infringes upon the proprietary rights of others, third parties may make such claimsinterruptions in the future. From time to time, third parties may claim that we have infringed upon their intellectual property rightsdelivery of raw materials, finished goods, and we may receive notices from such third parties asserting such claims. Any such infringement claims are thoroughly investigated and, regardless of merit, could be time-consuming and result in costly litigationcertain component parts. A supply shortage or damages, undermine the exclusivity and value of our brands, decrease sales, or require us to enter into royalty or licensing agreements that may not be on acceptable terms and thatdelivery chain interruption could have a material adverse effect on our business, financial condition, and results of operations.
We rely upon regular deliveries of raw materials, finished goods, and certain component parts. For certain raw materials that are used in our products, we depend on a single or limited number of suppliers for our materials, and we typically do not have long-term contracts with our suppliers. If we are not able to accurately forecast our supply needs, our limited number of suppliers may make it difficult to quickly obtain additional raw materials to respond to shifting or increased demand. In addition, a supply shortage could occur as a result of unanticipated increases in market demand, including as a result of accelerated demand in reaction to the threat of tariffs or trade restrictions; difficulties in production or delivery, including insufficient energy supply; financial difficulties; or catastrophic events in the supply chain. Furthermore, because our products and the components of some of our products are subject to regulation, changes to these regulations could cause delays in delivery of raw materials, finished goods, and certain component parts.
25We have experienced impacts to our supply chain from economic and geopolitical uncertainties, including the ongoing military conflict between Russia and Ukraine, which have resulted in delays in receiving materials, manufacturing downtime, increased backlogs, and delayed out-bound freight. Although less severe than prior years, we have continued to experience adverse effects of supply chain disruptions in 2023 and may continue to in the future.
ship orders on time and could idle some of our manufacturing capability for those products. This could result in a loss of revenues, reduced margins, and damage to our relationships with customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Increases in labor costs, potential labor disputes, and work stoppages at our facilities or the facilities of our suppliers could have a material adverse effect on our business, financial condition, and results of operations.
Our financial performance is affected by the availability of qualified personnel and the cost of labor. We have employees in the U.S. and Canada that are unionized workers, and the majority of our workforce in other countries belong to work councils or are otherwise subject to labor agreements. U.S. and Canada employees represented by these unions are subject to collective bargaining agreements that are subject to periodic negotiation and renewal. If we are unable to enter into new, satisfactory labor agreements with our unionized employees upon expiration of their agreements, we could experience a significant disruption of our operations, which could cause us to be unable to deliver products to customers on a timely basis. Such disruptions could result in a loss of business and an increase in our operating expenses, which could reduce our net revenues and profit margins. In addition, our non-unionized labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face.
We believe many of our direct and indirect suppliers also have unionized workforces. Strikes, work stoppages, or slowdowns experienced by suppliers could result in slowdowns or closures of facilities where components of our products are manufactured or delivered. Any interruption in the production or delivery of these components could reduce sales, increase costs, and have a material adverse effect on us.
Our business will suffer if certain key officers or employees discontinue employment with us or if we are unable to retain and recruit executives, managers and retain highly skilled staffemployees at a competitive cost.
The success of our business depends upon the skills, experience, and efforts of our executives and other key officersemployees. Our senior management team has acquired specialized knowledge and employees. In recent years, we have hired a large number of key executives who haveskills with respect to our business, and will continue to be integral in the continuing transformation of our business. The loss of key personnelany of these individuals could have a material adverse effect onharm our business, financial condition,especially if we are not successful in developing adequate succession plans. In addition, we rely on the specialized knowledge and resultsexperience of operations. We do not maintain key-man life insurance policies on any members of management.certain key technical employees. Our business also depends on our ability to continue to recruit, train, and retain skilled employees, particularly skilled sales personnel. The loss of the services of anythese key personnel,executives and employees, or our inability to hire new personnel with the requisite skills, could impairhave a material adverse effect on our business, financial condition, and results of operations. For example, our ability to develop new products or enhance existing products, sell products to our customers, or manage our business effectively. Shouldeffectively could be impaired if we lose the services of any member of our senior management team, our board of directors would haveare unable to conductretain and attract qualified personnel. In addition, a search for a qualified replacement. This search may be prolonged, and we may not be able to locate and hire a qualified replacement. A significant increase in the wages paid by competing employers could result in a reduction of our qualified labor force, increases in the wage rates that we must pay, or both.
Our pension plan obligations are currently not fully funded, and we may have to make significant cash payments to these plans, which would reduce the cash available for our businesses.
Although we have closed our U.S. pension plan to new participants and have frozen future benefit accruals for current participants, we continue to have unfunded obligations under that plan. The funded levels of our pension plan depend upon many factors, including returns on invested assets, certain market interest rates, and the discount rate used to determine pension obligations. The projected benefit obligation and unfunded liability included in our consolidated financial statements as of December 31, 20172023 for our U.S. pension plan were approximately $435.7$283.9 million and $95.9$4.3 million, respectively. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our operations. In addition, a decrease in the discount rate used to determine pension obligations could increase the estimated value of our pension obligations, which would affect the reported funding status of our pension plans and would require us to increase the amounts of future contributions. Additionally, we have foreign defined benefit plans, some of which continue to be open to new participants. As of December 31, 2017,2023, our foreign defined benefit plans had unfunded pension liabilities of approximately $22.2 million and overfunded pension assets of approximately $1.9$27.0 million.
Under the Employee Retirement Income Security Act of 1974, as amended, or “ERISA”, the U.S. Pension Benefit Guaranty Corporation, or the “PBGC”, also has the authority to terminate an underfunded tax-qualified U.S. pension plan under certain circumstances. In the event our tax-qualified U.S. pension plans were terminated by the PBGC, we could be liable to the PBGC for an amount that exceeds the underfunding disclosed in our consolidated financial statements. In addition, because our U.S. pension plan has unfunded obligations, if we have a substantial cessation of operations at a U.S. facility and, as a result of such cessation of operations an event under ERISA Section 4062(e) is triggered, additional liabilities that exceed the amounts disclosed in our consolidated financial statements could arise, including an obligation for us to provide additional contributions or alternative security for a period of time after such an event occurs. Any such action could have a material adverse effect on our business, financial condition, and results of operations.
Risks Relating to Cybersecurity and Data Privacy
We are highly dependent on information technology, the disruption of which could significantly impede our ability to do business.
Our operations depend on our network of information technology systems, which are vulnerable to damage from hardware failure, fire, power loss, telecommunications failure, and impacts of terrorism, natural disasters, or other disasters. We rely on our information technology systems to accurately maintain books and records, record transactions, provide information to management and prepare our financial statements. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. Any damage to our information technology systems could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition, and results of operations. Periodically, these systems need to be expanded, updated, or upgraded as our business needs change. We may not be able to successfully implement changes in our information technology systems without experiencing difficulties, which could require significant financial and human resources. Moreover, our increasing dependence on technology may exacerbate this risk.
Our systems and IT infrastructure have been and may continue to be subject to security breaches and other cybersecurity incidents.
We rely on the accuracy, capacity, and security of digital technologies, including information systems, infrastructure, and cloud applications, some of which are managed or hosted by third party service providers, and the sale of our products may involve the transmission and/or storage of data, including in certain instances customers’ and employees’ business and personally identifiable information. Maintaining the security of computers, computer networks, and data storage resources is a critical issue for us and our customers, as security breaches, including computer viruses and malware, denial of service actions, misappropriation of data and similar events through the internet, including via devices and applications connected to the internet, and through email attachments and persons with access to these information systems could result in vulnerabilities and loss of and/or unauthorized access to confidential information. The use of generative artificial intelligence (“AI”) in our internal systems may create new vulnerabilities. Because generative AI is a new field, understanding of security risks and protection methods continues to develop. We have experienced and could continue to experience cybersecurity incidents, such as attempts by experienced hackers, cybercriminals, or others with authorized access to our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information, some of which have been, and may continue to be, successful. If our IT systems or those managed or hosted by third party service providers are breached, or cease to function as anticipated, we could suffer interruptions or inefficiencies in our operations, harm to our reputation, or misappropriation of proprietary or confidential information, including personal information. This could lead some customers to stop purchasing our products and reduce or delay future purchases of our products or use competing products.
In addition, we could face enforcement actions by U.S. states, the U.S. federal government, or foreign governments, which could result in fines, penalties, and/or other liabilities, which may cause us to incur legal fees and costs, and/or additional costs associated with responding to the cyberattack. Increased regulation regarding cybersecurity may increase our costs of compliance, including fines and penalties, as well as costs of cybersecurity audits and associated repairs or updates to infrastructure, physical systems or data processing systems. Any of these actions could have a material adverse impact on our business and results of operations. Although we maintain insurance coverage to protect us against some of the risks, those policies may be insufficient to
cover all losses or all types of claims that may arise in the event we experience a cybersecurity incident, data breach or disruption, unauthorized access, or failure of systems.
In addition, we are subject to state, foreign, and international laws and regulations, as well as contractual obligations, that apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. These privacy and data-protection related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. In particular, the E.U. General Data Protection Regulation (“GDPR”), which became effective in 2018, poses increased compliance challenges both for companies operating within the E.U. and non-E.U. companies that administer or process certain personal data of E.U. residents. It is not possible to predict the ultimate content, and therefore effect, of data protection regulation over time, and efforts to comply with evolving regulation may result in additional costs.
We believe we have invested in industry-appropriate protections and monitoring practices for our data and information technology to reduce these risks and continue to monitor our systems on an ongoing basis for compliance with applicable privacy regulations and any current or potential threats. While we have not experienced any material breaches in security in our recent history, there can be no assurance that our efforts will prevent breakdowns or breaches to databases or systems that could have a material adverse effect on our business, financial condition, and results of operations, or that we will be subject to enforcement actions or penalties in connection with a failure or alleged failure to comply with applicable laws.
Risks Relating to our Governmental and Regulatory Environment
Changes in building codes and standards, including ENERGY STAR standards, could increase the cost of our products, lower the demand for our windows and doors, or otherwise adversely affect our business.
Our products and markets are subject to extensive and complex local, state, federal and foreign statutes, ordinances, rules, and regulations. These mandates, including building design and safety and construction standards and zoning requirements, affect the cost, selection, and quality requirements of building components like windows and doors.
These regulations often provide broad discretion to governmental authorities as to the types and quality specifications of products used in new residential and non-residential construction and home renovations and improvement projects, and different governmental authorities can impose different standards. Compliance with these standards and changes in such regulations may increase the costs of manufacturing our products or may reduce the demand for certain of our products in the affected geographical areas or product markets. Conversely, a decrease in product safety standards could reduce demand for our more modern products if less expensive alternatives that did not meet higher standards became available for use in that market. All or any of these changes could have a material adverse effect on our business, financial condition, and results of operations.
In addition, in order for our products to obtain the “ENERGY STAR” certification, they must meet certain requirements set by the EPA. Changes in the energy efficiency requirements established by the EPA for the ENERGY STAR label could increase our costs, and a lapse in our ability to label our products as such or to comply with the new standards, may have a material adverse effect on our business, financial condition, and results of operations.
Domestic and foreign regulations, legislation and government policy, including those applicable to general business operations, could increase the costs of operating our business and adversely affect our business.
We are subject to a variety of regulation, legislation and government policies from U.S. and foreign governmental authorities relating to wage requirements, employee benefits, and other matters. While it is not possible to predict whether and when any changes to the federal or administrative landscape will occur, changes at the local, state, and federal level could significantly impact our business. For example, changes in local minimum or living wage requirements, rights of employees to unionize, healthcare regulations, and other requirements relating to employee benefits could increase our labor costs, which would in turn increase our cost of doing business. In addition, our international operations are subject to laws applicable to foreign operations, trade protection measures, foreign labor relations, differing intellectual property rights, privacy regulations, other legal and regulatory constraints, and currency regulations of the countries or regions in which we currently operate or where we may operate in the future. These factors may restrict the sales of, or increase costs of, manufacturing and selling our products.
We may be subject to significant compliance costs, as well as liabilities under environmental, health, and safety laws and regulations.
Our past and present operations, assets, and products are subject to extensive environmental laws and regulations at the federal, state, and local level worldwide. These laws regulate, among other things, air emissions, the discharge or release of materials into the environment, the handling and disposal of wastes, remediation of contaminated sites, worker health and safety, and the impact of products on human health and safety and the environment. Under certain of these laws, liability for contaminated property may be imposed on current or former owners or operators of the property or on parties that generated or arranged for waste sent to the property for disposal. Liability under these laws may be joint and several and may be imposed without regard to fault or the legality of
the activity giving rise to the contamination. Notwithstanding our compliance efforts, we may still face material liability, limitations on our operations, fines, or penalties for violations of environmental, health, and safety laws and regulations, including releases of regulated materials and contamination by us or previous occupants at our current or former properties or at offsite disposal locations we use.
The applicable environmental, health, and safety laws and regulations, and any changes to them or in their enforcement, may require us to make material expenditures with respect to ongoing compliance with or remediation under these laws and regulations or require that we modify our products or processes in a manner that increases our costs and/or reduces our profitability. For example, additional pollution control equipment, process changes, or other environmental control measures may be needed at some of our facilities to meet future requirements. In addition, discovery of currently unknown or unanticipated soil or groundwater conditions at our properties could result in significant liabilities and costs. Accordingly, we are unable to predict the exact future costs of compliance with or liability under environmental, health, and safety laws and regulations.
Legal, regulatory or stakeholder preferences regarding climate change and Environmental, Social, and Governance (“ESG”) matters could have an adverse impact on the Company’s business and results of operations.
Concerns over the long-term effects of climate change have led to, and may continue to lead to, governmental efforts around the world to mitigate those effects. We will need to respond to any new laws and regulations as well as to consumer, investor and business preferences resulting from climate change concerns, which may have an impact on our business, from the demand for our customers’ products in various industries to our costs of compliance in the manufacturing and servicing of our customers’ products, all of which may impact our results of operations and result in costs to us in order to comply with any new laws, regulations or preferences. Overall, climate change, its effects and the resulting, unknown impact on government regulation, consumer, investor and business preferences could have a long-term material adverse effect on our business and results of operations.
Heightened stakeholder focus on ESG issues related to our business requires the continuous monitoring of various and evolving laws, regulations, standards and expectations and the associated reporting requirements. There can be no certainty that we will adequately or timely meet stakeholder expectations and reporting requirements, which may result in noncompliance with any imposed regulations, the loss of business, reputational impacts, diluted market valuation, an inability to attract and retain customers, and an inability to attract and retain top talent. In addition, our adoption and the reporting of certain standards or mandated compliance to certain requirements could necessitate additional investments that could impact our profitability. The lack of economic and regulatory certainty surrounding ESG may have an adverse impact on our business and results of operations.
Further, we have established and publicly disclosed ESG targets and goals and other sustainability commitments that are subject to a variety of assumptions, risks and uncertainties. If we are unable to, or perceived to be unable to, meet these targets, goals or commitments, our reputation, business and results of operations may be adversely impacted. In addition, not all of our competitors may seek to establish climate or other ESG targets and goals, or at a comparable level to ours, which could result in our competitors achieving competitive advantages through lower supply chain or operating costs.
Changes to legislative and regulatory policies that currently promote home ownership may have a material adverse effect on our business, financial condition, and results of operations.
Our markets are also affected by legislative and regulatory policies, such as U.S. tax rules, allowing for deductions of mortgage interest and the mandate of government-sponsored entities like Freddie Mac and Fannie Mae to promote home ownership through mortgage guarantees on certain types of home loans. The Tax Act passed in the U.S. in December 2017 made significant changes to some of these historical benefits of home ownership. The specific changes which could affect our markets are, among others, a reduction of the maximum amount of home mortgage indebtedness for which a tax deduction for interest paid may be claimed, an elimination of the deduction for interest paid on home equity indebtedness, and a limitation on the amount of state and local taxes allowed to be deducted annually as itemized deductions. These changes to the tax code and any future policy changes may adversely impact demand for our products and have a material adverse effect on our business, financial condition, and results of operations.
Lack of transparency, threat of fraud, public sector corruption, and other forms of criminal activity involving government officials increases the risk of potential liability under anti-bribery/anti-corruption or anti-fraud legislation, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws and regulations.
As a result of the international nature of our operations, we may enter from time to time into negotiations and contractual arrangements with parties affiliated with foreign governments and their officials in the ordinary course of business. In connection with these activities, we may be subject to anti-corruption laws in various jurisdictions, including the U.S. Foreign Corrupt Practices Act, or the “FCPA”, the U.K. Bribery Act and other anti-bribery laws applicable to jurisdictions where we do business that prohibit improper payments or offers of payments to foreign government officials and political parties and others for the purpose of obtaining or retaining business, or otherwise receiving discretionary favorable treatment of any kind, and require the maintenance of internal controls to prevent such payments. In particular, we may be held liable for actions taken by agents in foreign countries where we operate, even though such parties are not always subject to our control. We have established anti-bribery/anti-corruption policies and
procedures and offer several channels for raising concerns in an effort to comply with the laws and regulations applicable to us. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these laws and regulations in every transaction in which we may engage. Allegations of violations of the FCPA or other anti-bribery or anti-corruption laws may result in internal, independent, or government investigations. Any determination that we have violated the FCPA or other anti-bribery/anti-corruption laws (whether directly or through acts of others, intentionally or through inadvertence) could result in severe criminal and civil sanctions and other liabilities that could have a material adverse effect on our business, reputation, financial condition, and results of operations.
As we continue to expand our business globally, including through foreign acquisitions, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside of the U.S. and our financial condition and results of operations. In addition, any acquisition of businesses with operations outside of the U.S. may exacerbate this risk.
Our annual effective tax rate and the amount of taxes we pay can change materially as a result of changes in U.S. and foreign tax laws, changes in the mix of our U.S. and foreign earnings, adjustments to our estimates for the potential outcome of any uncertain tax issues, and audits by federal, state and foreign tax authorities.
As a large multinational corporation, we are subject to U.S. federal, state and local, and many foreign tax laws and regulations, all of which are complex and subject to significant change and varying interpretations. Changes in these laws or regulations, or any change in the position of taxing authorities regarding their application, administration or interpretation, could have a material adverse effect on our business, consolidated financial condition or results of our operations. For example, in August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) into law, which includes a new corporate alternative minimum tax and an excise tax on corporate stock repurchases. Future changes in tax law could significantly impact our provision for income taxes, the amount of taxes payable, and our deferred tax asset and liability balances. In addition, our products, and our customers’ products, are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions in which we operate. Increases in these indirect taxes could affect the affordability of our products and our customers’ products, and, therefore, reduce demand.
Recently, international tax norms governing each country’s jurisdiction to tax cross-border international trade have evolved, and are expected to continue to evolve, due in part to the Base Erosion and Profit Shifting project led by the Organization for Economic Cooperation and Development (“OECD”), which represents a coalition of member countries including the United States, and supported by the G20. Changes in these laws and regulations, or any change in the position of tax authorities regarding their application, administration or interpretation could adversely affect our financial results. In addition, a number of countries are actively pursuing changes to their tax laws applicable to multinational corporations.
Due to widely varying tax rates in the taxing jurisdictions applicable to our business, a change in income generation to higher taxing jurisdictions or away from lower taxing jurisdictions may also have an adverse effect on our financial condition and results of operations.
We make estimates of the potential outcome of uncertain tax issues based on our assessment of relevant risks and facts and circumstances existing at the time, and we use these assessments to determine the adequacy of our provision for income taxes and other tax-related accounts. These estimates are highly judgmental. Although we believe we adequately provide for any reasonably foreseeable outcome related to these matters, future results may include favorable or unfavorable adjustments to estimated tax liabilities, which may cause our effective tax rate to fluctuate significantly.
In addition, our income tax returns are subject to regular examination by domestic and foreign tax authorities. These taxing authorities may disagree with the positions we have taken or intend to take regarding the tax treatment or characterization of any of our transactions. If any tax authorities were to successfully challenge the tax treatment or characterization of any of our transactions, it could have a material adverse effect on our business, consolidated financial condition or results of our operations. Furthermore, regardless of whether any such challenge is resolved in our favor, the final resolution of such matter could be expensive and time consuming to defend and/or settle.
Changes in accounting standards, new interpretations of existing standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principlesGAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment, impairment of goodwill, and other intangible assets, inventories, lease obligations, pensions, self-insurance, tax matters, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported results.
Risks Relating to our Indebtedness
Our failure to comply with the credit agreements governing our Credit Facilities and indentures governing the Senior Notes and Senior Secured Notes, including as a result of events beyond our control, could trigger events of default and acceleration of our indebtedness. Defaults under our debt agreements could have a material adverse effect on our business, financial condition, and results of operations.
If there were an event of default under the credit agreements governing our Credit Facilities, the indentures governing the Senior Notes and Senior Secured Notes, or other indebtedness that we may incur, the holders of the defaulted indebtedness could cause all amounts outstanding with respect to that indebtedness to be immediately due and payable. It is likely that our cash flows would not be sufficient to fully repay borrowings under our Credit Facilities and principal amounts of the Senior Notes and Senior Secured Notes, if accelerated upon an event of default. If we are unable to repay, refinance, or restructure our secured debt, the holders of such indebtedness may proceed against the collateral securing that indebtedness.
Furthermore, any event of default or declaration of acceleration under one debt instrument may also result in an event of default under one or more of our other debt instruments. In exacerbated or prolonged circumstances, one or more of these events could result in our bankruptcy or liquidation. Accordingly, any default by us on our debt could have a material adverse effect on our business, financial condition, and results of operations.
Our indebtedness could adversely affect our financial flexibility and our competitive position.
Financial information regarding our indebtedness is included in Note 1612 - Notes Payable and Long-Term Debt to our financial statements included in this Form 10-K.
Our level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness and could have other material consequences, including:
•limiting our ability to obtain financing in the future for working capital, capital expenditures, acquisitions, debt service, or other general corporate purposes;
•requiring us to use a substantial portion of our available cash flow to service our debt, which will reduce the amount of cash flow available for working capital, capital expenditures, acquisitions, and other general corporate purposes;
•increasing our vulnerability to general economic downturns and adverse industry conditions;
•limiting our flexibility in planning for, or reacting to, changes in our business and in our industry in general;
•limiting our ability to invest in and develop new products;
•placing us at a competitive disadvantage compared to our competitors that are not as highly leveraged, as we may be less capable of responding to adverse economic conditions, general economic downturns, and adverse industry conditions;
•restricting the way we conduct our business because of financial and operating covenants in the agreements governing our existing and future indebtedness;
•increasing the risk of our failing to satisfy our obligations with respect to borrowings outstanding under our Credit Facilities, Senior Notes, and Senior Secured Notes and/or being able to comply with the financial and operating covenants contained in our debt instruments, which could result in an event of default under the credit agreements governing our Credit Facilities and the agreements governing our other debt, including the indentureindentures governing the Senior Notes and Senior Secured Notes, that, if not cured or waived, could have a material adverse effect on our business, financial condition, and results of operations; and
•increasing our cost of borrowing.
The credit agreements governing our Credit Facilities and the indentureindentures governing the Senior Notes and Senior Secured Notes impose significant operating and financial restrictions on us that may prevent us from capitalizing on business opportunities.
The credit agreements governing our Credit Facilities and the indentureindentures governing the Senior Notes and Senior Secured Notes impose significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
•incur or guarantee additional indebtedness;
•make certain loans, or investments, or restricted payments, including dividends to our shareholders;
•repurchase or redeem capital stock;
•engage in certain transactions with affiliates;
•sell certain assets (including stock of subsidiaries) or merge with or into other companies; and
•create or incur liens.
Under the terms of the ABL Facility, we will at times be required to comply with a specified fixed charge coverage ratio when the amount of certain unrestricted cash balances of the U.S. and Canadian loan parties plus the amount available for borrowing by the U.S. borrowers and Canadian borrowers is less than a specified amount. The Australia Senior Secured Credit Facility and Euro Revolving Facility also contain financial maintenance covenants. Our ability to meet the specified covenants could be affected by events beyond our control, and our failure to meet these covenants will result in an event of default as defined in the applicable facility.
In addition, our ability to borrow under the ABL Facility is limited by the amount of the borrowing base applicable to U.S. dollar and Canadian dollar borrowings. Any negative impact on the elements of our borrowing base, such as eligible accounts receivable and inventory, will reduce our borrowing capacity under the ABL Facility. Moreover, the ABL Facility provides discretion to the agent bank acting on behalf of the lenders to impose additional requirements on what accounts receivable and inventory may be counted toward the borrowing base availability and to impose other reserves, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the agent bank will not impose such reserves or, were it to do so, that the resulting impact of this action would not materially and adversely impair our liquidity.
As a result of these covenants and restrictions, we are limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities or engage in other activities that may be in our long-term best interests. The terms of any future indebtedness we may incur could include more
restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, we may be unable to obtain waivers from the lenders or amend the covenants.
Our failure to comply with the credit agreements governing our Credit Facilities and indenture governing the Senior Notes, including as a result of events beyond our control, could trigger events of default and acceleration of our indebtedness. Defaults under our debt agreements could have a material adverse effect on our business, financial condition, and results of operations.
If there were an event of default under the credit agreements governing our Credit Facilities, the indenture governing the Senior Notes, or other indebtedness that we may incur, the holders of the defaulted indebtedness could cause all amounts outstanding with respect to that indebtedness to be immediately due and payable. It is likely that our cash flows would not be sufficient to fully repay borrowings under our Credit Facilities and principal amount of the Senior Notes, if accelerated upon an event of default. If we are unable to repay, refinance, or restructure our secured debt, the holders of such indebtedness may proceed against the collateral securing that indebtedness.
Furthermore, any event of default or declaration of acceleration under one debt instrument may also result in an event of default under one or more of our other debt instruments. In exacerbated or prolonged circumstances, one or more of these events could result in our bankruptcy or liquidation. Accordingly, any default by us on our debt could have a material adverse effect on our business, financial condition, and results of operations.
We require a significant amount of liquidity to fund our operations, and borrowing has increasedmay increase our vulnerability to negative unforeseen events.
Our liquidity needs vary throughout the year. If our business experiences materially negative unforeseen events, we may be unable to generate sufficient cash flow from operations to fund our needs or maintain sufficient liquidity to operate and remain in compliance with our debt covenants, which could result in reduced or delayed purchases of raw materials, planned capital expenditures, and other investments and adversely affect our financial condition or results of operations. Our ability to borrow under the ABL Facility may be limited due to decreases in the borrowing base as described above.
Despite our current debt levels, we may incur substantially more indebtedness. This could further exacerbate the risks associated with our substantial leverage.
We may incur substantial additional indebtedness in the future. Although the covenants under the credit agreements governing our Credit Facilities and indenture governing the Senior Notes provide certain restrictions on our ability to incur additional debt, the terms of such agreements permit us to incur significant additional indebtedness. To the extent that we incur additional indebtedness, the risk associated with our substantial indebtedness described above, including our possible inability to service our indebtedness, will increase.
Risks Relating to Ownership of Our Common Stock
The market price of our common stockCommon Stock may be highly volatile.
Our common stockCommon Stock has only been listed for public trading since January 27, 2017. Since that date, the price of our common stock, as reported by the NYSE, has ranged from a low of $24.95 on January 27, 2017 to a high of $42.27 on January 5, 2018. The trading price of our common stock may be volatile. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as other general economic, market or political conditions, could reduce the market price of our shares in spite of our operating performance. The followingVarious factors, including those listed in this Item 1A - Risk Factors section, may have a significant impact on the market price of our common stock:
negative trends in global economic conditions and/or activity levels in our end markets;
increases in interest rates used to finance home construction and improvements;
our ability to compete effectively against our competitors;
changes in consumer needs, expectations, or trends;
our ability to maintain our relationships with key customers;
our ability to implement our business strategy;
our ability to complete and integrate new acquisitions;
variations in the prices of raw materials used to manufacture our products;
adverse changes in building codes and standards or governmental regulations applicable to general business operations;
product liability claims or product recalls;
any legal actions in which we may become involved, including disputes relating to our intellectual property;
our ability to recruit and retain highly skilled staff;
actual or anticipated fluctuations in our quarterly or annual operating results;
trading volume of our common stock;
sales of our common stock by us, our executive officers and directors, or our shareholders (including certain affiliates of Onex) in the future; and
general economic and market conditions and overall fluctuations in the U.S. equity markets.Common Stock
In addition, broad market and industry factors, including the trading prices of the securities of our publicly-tradedpublicly traded competitors, may negatively affect the market price of our common stock,Common Stock, regardless of our actual operating performance, and factors beyond our control may cause our stock price to decline rapidly and unexpectedly. Furthermore, the stock market has experienced extreme volatility that, in some cases, has been unrelated or disproportionate to the operating performance of particular companies.
Publishing earnings guidance subjects us to risks, including increased stock volatility, that could lead to potential lawsuits by investors.
Because we publish earnings guidance, we are subject to a number of risks. Actual results may vary from the guidance we provide investors from time to time, such that our stock price may decline following, among other things, any earnings release or guidance that does not meet market expectations. It has become increasingly commonplace for investors to file lawsuits against companies following a rapid decrease in market capitalization. We have been in the past, and may be in the future, named in these types of lawsuits. These types of lawsuits can be costly and divert management attention and other resources away from our business, regardless of their merits, and could result in adverse settlements or judgments.
We may be subject to securities litigation, which is expensive and could divert management attention.
Our share price may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future.litigation. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, and results of operations. Any adverse determination in litigation could also subject us to significant liabilities.
Because Onex owns a substantial portion of our common stock, it may influence major corporate decisions and its interests may conflict with the interests of other holders of our common stock.
Onex beneficially owns approximately 32.9 million shares of our common stock representing approximately 31.0% of our outstanding shares. Although we are no longer a controlled company, Onex will continue to be able to influence matters requiring approval by our shareholders and/or our board of directors, including the election of directors and the approval of business combinations or dispositions and other extraordinary transactions. They may also have interests that differ from other shareholdersliabilities and may vote in a way with which other shareholders disagree and which may be adverse to their interests. The concentration of ownership may have the effect of delaying, preventing, or deterring a change of control ofnegatively impact our company, could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and may materially and adversely affect the market price of our common stock. In addition, Onex may in the future own businesses that directly compete with ours. Further, for so long as Onex owns at least 5% of our outstanding shares, Onex has the right to purchase its pro rata portion of the primary shares offered in any future public offering. This right could result in Onex continuing to maintain a substantial ownership of our common stock.
Our directors who have relationships with Onex may have conflicts of interest with respect to matters involving our Company.
Two of our twelve directors are affiliated with Onex. These persons have fiduciary duties to both us and Onex. As a result, they may have real or apparent conflicts of interest on matters affecting both us and Onex, which in some circumstances may have interests adverse to ours. Onex is in the business of making or advising on investments in companies and may hold, and may from time to time in the future acquire, interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business or that are suppliers or customers of ours. In addition, as a result of Onex’ ownership interest, conflicts of
interest could arise with respect to transactions involving business dealings between us and Onex including potential acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by us, and other matters.
In addition, our restated certificate of incorporation provides that the doctrine of “corporate opportunity” will not apply with respect to us, to Onex or certain related parties or any of our directors who are employees of Onex or its affiliates in a manner that would prohibit them from investing in competing businesses or doing business with our customers. To the extent they invest in such other businesses, Onex may have differing interests than our other shareholders.
As a result of the completion of the secondary offering of our common stock on May 31, 2017, we are no longer a “controlled company” within the meaning of the corporate governance standards of the NYSE. However, we continue to qualify for, and may rely on, exemptions from certain corporate governance requirements that would otherwise provide protection to our shareholders during a one-year transition period.
Because Onex no longer owns a majority of our common stock, we are no longer a “controlled company” within the meaning of the corporate governance standards of the NYSE. However, we continue to qualify for, and may rely on, exemptions from certain corporate governance standards that would otherwise provide protection to our shareholders during a one-year transition period that ends May 31, 2018. The NYSE rules require that we (i) have at least one independent director on each of our governance and nominating committee and compensation committee by the date we ceased to qualify as a “controlled company”, (ii) have a majority of independent directors on each of our governance and nominating committee and compensation committee within 90 days of the date we ceased to qualify as a “controlled company”, and (iii) have a fully independent governance and nominating committee and compensation committee within one year of the date we ceased to qualify as a “controlled company”. We are also required to have a majority independent board of directors within one year of the date we ceased to qualify as a “controlled company” and to perform an annual performance evaluation of our governance and nominating and compensation committees. Our board of directors has determined that two of the three members of our governance and nominating committee, three of the four members of our compensation committee, all of the members of our audit committee and six of the twelve members of our board of directors are independent for purposes of the NYSE corporate governance standards.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act of 2002, and the NYSE, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we are subject to the reporting requirements of the Exchange Act and the corporate governance standards of the Sarbanes-Oxley Act of 2002 and the NYSE and SEC rules and requirements. As a result, we have incurred and will continue to incur significant legal, regulatory, accounting, investor relations, and other costs that we did not incur as a private company. These requirements may also place a strain on our management, systems, and resources. The Exchange Act requires us to file annual, quarterly, and current reports with respect to our business and financial condition within specified time periods and to prepare proxy statements with respect to our annual meeting of shareholders. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. The NYSE requires that we comply with various corporate governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting and comply with the Exchange Act and NYSE requirements, significant resources and management oversight will be required. As a public company, we are required to:
expand the roles and duties of our board of directors and committees of the board;
institute more formal comprehensive financial reporting and disclosure compliance functions;
supplement our internal accounting and auditing function;
enhance and formalize closing procedures for our accounting periods;
enhance our investor relations function;
establish new or enhanced internal policies, including those relating to disclosure controls and procedures; and
involve and retain to a greater degree outside counsel and accountants in the activities listed above.
These activities may divert management’s attention from revenue producing activities to management and administrative oversight. Any of the foregoing could have a material adverse effect on us and the price of our common stock. In addition, failure to comply with any laws or regulations applicable to us may result in legal proceedings and/or regulatory investigations.
Material weaknesses in our internal control over financial reporting or our failure to remediate such material weaknesses could result in a violation of Section 404 of the Sarbanes-Oxley Act, or in a material misstatement in our financial statements not being prevented or detected, and could affect investor confidence in the accuracy and completeness of our financial statements, as well as our common stockshare price.
As a public company, we are required to comply with Section 404 of the Sarbanes-Oxley Act. We are required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act with our Form 10-K for the fiscal year ended December 31, 2017 and will be required to include an auditor attestation on management’s internal controls report with our Form 10-K for the fiscal year ended December 31, 2018. If we fail to abide by the applicable requirements of Section 404, regulatory authorities, such as the SEC, might subject us to sanctions or investigation, and our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting pursuant to an audit of our controls. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Accordingly, our internal control over financial reporting may not prevent or detect misstatements because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.
During the preparation of our December 31, 2015 financial statements, we identified material weaknesses in our internal control over financial reporting, and while we have implemented additional controls since that time, these controls have not been in operation for a sufficient amount of time for us to conclude that these material weaknesses have been remediated as of December 31, 2017. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. During 2015, we restructured how we manage our Europe business, which led to turnover in the accounting staff of our Europe operations. In addition, our tax department had significant turnover during 2015, leaving the department with recently hired personnel who were unfamiliar with our year-end closing process, which resulted in our tax department being unable to complete its standard fiscal year close work in a timely manner. As a result, our staff did not have adequate time to properly review the information provided to our registered public accounting firm as part of the audit. Our registered public accounting firm identified numerous errors in the schedules and disclosures provided to them during the audit process. While such errors were rectified prior to the completion of the 2015 audit, and there were no material misstatements identified in our disclosures or financial statements subsequent to year-end, management and our registered public accounting firm determined that (i) we did not operate controls to monitor the accuracy of income tax expense and related balance sheet accounts, including deferred income taxes, and (ii) we failed to operate controls to monitor the presentation and disclosure of income taxes. As a result of these material weaknesses, management determined that the ineffective controls over income tax accounting constituted material weaknesses.
While we continue to address these material weaknesses and to strengthen our overall internal control over financial reporting, we may discover other material weaknesses going forward that could result in inaccurate reporting of our financial condition or results of operations. In addition, neither our management nor any independent registered public accounting firm has ever performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified. Inadequate internal control over financial reporting may cause investors to lose confidence in our reported financial information. Any loss of confidence in the reliability of our financial statements or other negative reaction to our failure to develop timely or adequate disclosure controls and procedures or internal controls could result in a decline in the price of our common stock and may restrict access to the capital markets and may adversely affect the price of our common stock.
Future sales, or the perception of future sales, of shares of our common stock in the public market by us or our existing shareholders could cause our stock price to fall.
The sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, including sales by Onex, could materially adversely affect the prevailing market price of our common stock. As of December 31, 2017, we had 105,990,483 shares of common stock outstanding.
Shares held by Onex and certain of our directors, officers and existing shareholders are eligible for resale, subject to volume, manner of sale and other limitations under Rule 144. In addition, pursuant to the Registration Rights Agreement (as defined below), each have the right, subject to certain conditions, to require us to register the sale of shares owned by such persons under the federal securities laws. By exercising their registration rights, and selling a large number of shares, these holders could cause the prevailing market price of our common stock to decline. In addition, shares issued or issuable upon exercise of options and vested RSUs will be eligible for sale from time to time.
In addition, as of December 31, 2017 we had 4,649,747 shares reserved for issuance pursuant to equity awards outstanding under our 2011 Stock Incentive Plan and 817,041 shares reserved for issuance pursuant to equity awards under our 2017 Omnibus Equity Plan. These shares have been registered by us on Form S-8 and, upon exercise of options and vesting of RSUs, will be eligible for sale from time to time or, will be eligible for sale immediately following exercise of such options.
Our employees, officers, and directors may elect to sell shares of our common stock in the public market. Sales of a substantial number of shares of our common stock in the public market could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
The ESOP and the JELD-WEN, Inc. KSOP (“KSOP”), are designed as a tax-qualified retirement plans and employee stock ownership plans under the Code. Participants whose employment with us or our subsidiaries is terminated are entitled to receive distributions of accounts held under the ESOP and KSOP at specified times and in specified forms. In addition, each plan permits diversification of our common stock held in participants’ accounts. The ESOP and KSOP may sell shares in the open market to fund hardship distributions and diversifications or participants may sell shares received as part of their distributions. In the year ended December 31, 2017, 709,670 shares were either sold by the plans to cover cash distributions and diversifications or distributed to participants.
In the future, we may issue securities to raise cash for acquisitions or otherwise. We may also acquire interests in other companies by using a combination of cash and our common stock or just our common stock.
We may also issue securities convertible into our common stock. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common stock.
If securities or industry analysts cease publishing research or reports about us, our business, or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our stock, our stock price and trading volume could decline.
The trading market for our common stock can be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price could decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Because we have no current plans to pay cash dividends on our shares of common stock,Common Stock, shareholders must rely on appreciation of the value of our common stockCommon Stock for any return on their investment.
We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business, to repay debt and potentially repurchase shares, and have no current plans to declare or pay any cash dividends in the foreseeable future. In addition, the terms of our Credit Facilities, Senior Notes, Senior Secured Notes, and any future debt agreements may preclude us from paying dividends. As a result, we expect that only appreciation of the price of our common stock,Common Stock, if any, will provide a return to shareholders for the foreseeable future.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders, and may prevent attempts by our shareholders to replace or remove our current management.
Provisions in our restated certificate of incorporation and our amended and restated bylaws, as well as provisions of the Delaware General Corporation Law, or the “DGCL”, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, including transactions in which shareholders might otherwise receive a premium for their shares. Among other things, our restated certificate of incorporation and amended and restated bylaws:
divide our board of directors into three classes with staggered three-year terms;
limit the ability of shareholders to remove directors only “for cause”;
provide that our board of directors is expressly authorized to adopt, alter, or repeal our bylaws;
authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;
prohibit shareholder action by written consent, which requires all shareholder actions to be taken at a meeting of our shareholders;
prohibit our shareholders from calling a special meeting of shareholders ;
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by shareholders at shareholder meetings; and
require the approval of holders of at least two-thirds of the outstanding shares of common stock to amend our bylaws and certain provisions of our certificate of incorporation.
We have also opted out of Section 203 of the DGCL, which, subject to some exceptions, prohibits business combinations between a Delaware corporation and an interested shareholder, which is generally defined as a shareholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the shareholder became an interested shareholder. At some time in the future, we may again be governed by Section 203. Section 203 could have the effect of delaying, deferring or preventing a change in control that our shareholders might consider to be in their best interests.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.
Our restated certificate of incorporation provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our restated certificate of incorporation provides, unless we consent to an alternative forum, that the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior Court of the State of Delaware, or, if such other court does not have jurisdiction, the U.S. District Court for the District of Delaware) shall be the exclusive forum for any claims, including claims on behalf of JWH, brought by a shareholder (i) that are based upon a violation of a duty by a current or former director or officer or shareholder in such capacity or (ii) as to which the DGCL confers jurisdiction upon the Court of Chancery of the State of Delaware. This provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find the provision contained in our restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Because we are a holding company with no operations of our own, we rely on dividends, distributions, and transfers of funds from our subsidiaries, and we could be harmed if such distributions were not made in the future.
We are a holding company that conducts all of our operations through subsidiaries and the majority of our operating income is derived from JWI, our main operating subsidiary. Consequently, we rely on dividends or advances from our subsidiaries. We have no current plans to declare or pay dividends on our common stockCommon Stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common stock,Common Stock, none of our subsidiaries will be obligated to make funds available to us for the payment of dividends. The ability of such subsidiaries to pay dividends to us is subject to applicable local law and may be limited due to terms of other contractual arrangements, including our indebtedness. Such laws and restrictions would restrict our ability to continue operations. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock.Common Stock.
Item 1B - Unresolved Staff Comments.
None.
Item 1C - Cybersecurity.
Risk Management and Strategy
We maintain a comprehensive process for assessing, identifying and managing material risks from cybersecurity threats as part of our overall risk management system and processes. Our cybersecurity risk management processes include the following:
a.We leverage the National Institute of Standards and Technology (“NIST”) framework to help ensure the Company’s risk posture remains in alignment with the Company’s overall risk appetite.
b.The Company utilizes policies, software, training programs, hardware solutions and managed services to protect and monitor our environment, including multifactor authentication on all critical systems, firewalls, intrusion detection and prevention systems, vulnerability and penetration testing, identity and access management systems and 24x7 security operations center.
c.The Company’s approach to managing cybersecurity and digital risk is led by our CIO and CISO. Our CIO is supported by the Company at the highest levels and regularly engages with cross-functional teams at the Company, including Legal, Audit, Finance, Human Resources and Enterprise Risk Management.
d.We also carry insurance that provides protection against the potential losses arising from a cybersecurity incident. Such insurance may be insufficient to cover all losses or all types of claims that may arise.
e.Our cybersecurity team conducts semi-annual cyber awareness training for professional associates using an independent third-party security training provider to educate best practices, policies and responsibilities pertaining to cybersecurity. We also conduct quarterly simulated phishing tests to generate awareness and run tabletop exercises to simulate a response to a cybersecurity incident and use the findings to improve our practices, procedures and technologies.
f.Our cybersecurity incident response plan coordinates the activities we take to prepare for, detect, respond to, and recover from cybersecurity incidents, which include processes to triage, assess severity for, escalate, contain, investigate, communicate and remediate the incident, as well as to comply with potentially applicable legal obligations and mitigate brand and reputational damage.
g.Our cybersecurity team regularly conduct tests of our information security environment and controls through vulnerability scanning, penetration testing and attack simulation testing.
Additionally, our cybersecurity risk management processes include review and assessment by external, independent third parties, who assess the maturity of our cybersecurity program and identify areas for continued focus and improvement. Furthermore, our Legal Department advises the Board about best practices for cybersecurity oversight by the Board, and the evolution of that oversight over time.
Our cybersecurity risk management processes extend to the oversight and identification of threats associated with our use of third-party service providers. Our cybersecurity team conducts third-party software security reviews for new software products being implemented into our production environments. The Company also has a third-party risk management process that regularly assesses and monitors risks, including cybersecurity, from vendors and suppliers.
See “Risk Factors” in Item 1A of this Annual Report on Form 10-K for information on cybersecurity risks that may materially affect our business strategy, results of operations and financial condition.
Governance
The cybersecurity risk management processes described above are led by our CIO and CISO, each having more than 25 years of information security experience. Our Board, Audit Committee, senior management and the Enterprise Risk Management Committee (a management committee of senior representatives from corporate functions and business lines) devote resources to cybersecurity and risk management processes. The Audit Committee is primarily responsible for the oversight of enterprise risk management and cybersecurity risks, including cybersecurity threats. To fulfill this responsibility, the Audit Committee receives periodic reports from the CIO. These reports include information regarding updates on cybersecurity initiatives, cybersecurity metrics, such as phishing
results and attack volume metrics, results of any assessments performed by internal stakeholders or external third-party advisors and updates on cybersecurity trends and insights. The CIO provides a cybersecurity update to the full Board at least annually.
Item 2 - Properties
Our principal executive offices areoffice is located in Charlotte, North Carolina. We operate 123 manufacturing facilities, 22 distribution facilities,lease administrative office space in Charlotte, North Carolina and 55 showrooms (which are often co-located with a manufacturing or distribution facility) located in 22 countries. In addition, weBirmingham, U.K. We also own andor lease other properties to support our primary operating activities, including sales offices closed facilities, and administrative office space in Klamath Falls, Oregon, which we own, as well as Charlotte, North Carolina; Birmingham, U.K.; and Sydney, Australia, each of which we lease. Our facilities in the U.S., Canada, St. Kitts, St. Maarten, Chile, Peru, and Mexico are used primarily for operations involving our North America segment; our facilities in the U.K., France, Austria, Switzerland, Hungary, Germany, Sweden, Denmark, Latvia, Estonia, Finland, and Russia are used primarily for operations involving our Europe segment; and our facilities in Australia, New Zealand, Malaysia, and Indonesia are used primarily for operations involving our Australasia segment.Oregon.
| | | | | | | | | | | | | |
| Manufacturing | | Distribution | | |
North America | | | | | |
United States and Caribbean | 38 | | 13 | | |
Canada | 4 | | 2 | | |
| | | | | |
| | | | | |
| 42 | | 15 | | |
Europe | | | | | |
United Kingdom | 2 | | — | | |
France | 2 | | — | | |
Austria | 3 | | — | | |
| | | | | |
Czech Republic | 1 | | — | | |
Switzerland | 1 | | — | | |
Hungary | 1 | | — | | |
Germany | 4 | | 1 | | |
Sweden | 2 | | — | | |
Denmark | 3 | | — | | |
Latvia | 2 | | — | | |
Estonia | 3 | | — | | |
Finland | 2 | | — | | |
| 26 | | 1 | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total JELD-WEN | 68 | | 16 | | |
|
| | | | | | | | |
| Manufacturing | | Distribution | | Showrooms |
North America | | | | | |
United States | 39 |
| | 7 |
| | — |
|
Canada | 4 |
| | 6 |
| | — |
|
St. Kitts | — |
| | 1 |
| | — |
|
Chile | 1 |
| | — |
| | — |
|
Peru | 1 |
| | — |
| | — |
|
Mexico | 2 |
| | — |
| | — |
|
| 47 |
| | 14 |
| | — |
|
Europe | | | | | |
United Kingdom | 5 |
| | 1 |
| | — |
|
France | 2 |
| | — |
| | — |
|
Austria | 2 |
| | — |
| | 3 |
|
Croatia | — |
| | — |
| | 1 |
|
Switzerland | 1 |
| | — |
| | 3 |
|
Hungary | 1 |
| | — |
| | — |
|
Germany | 2 |
| | 1 |
| | — |
|
Sweden | 3 |
| | — |
| | — |
|
Denmark | 3 |
| | — |
| | — |
|
Latvia | 3 |
| | — |
| | — |
|
Estonia | 3 |
| | — |
| | — |
|
Finland | 5 |
| | — |
| | — |
|
| 30 |
| | 2 |
| | 7 |
|
Australasia | | | | | |
Australia | 43 |
| | 5 |
| | 48 |
|
New Zealand | — |
| | 1 |
| | — |
|
Indonesia | 2 |
| | — |
| | — |
|
Malaysia | 1 |
| | | | |
| 46 |
| | 6 |
| | 48 |
|
Total JELD-WEN | 123 |
| | 22 |
| | 55 |
|
Item 3 - Legal Proceedings
We are involved in various legal proceedings, claims,Information relating to this item is included within Note 25 - Commitments and government audits arising in the ordinary courseContingencies of business. We record our best estimate of a loss, including estimated defense costs, when the loss is considered probable and the amount of such loss can be reasonably estimated. When a loss is probable and there is a range of estimated loss with no best estimate within the range, we record the minimum estimated liability related to the lawsuit or claim. As additional information becomes available, we assess the potential liability related to pending litigation and claims and revise our accruals if necessary. Because of uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ materially from our estimates. In the opinion of management and based on the liability accruals provided, our ultimate exposure with respect to these lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our operating results for a particular reporting period.
Steves & Sons Litigation
We 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. We have given notice of termination of one of these contracts and, on June 29, 2016, the counterparty to the agreement, Steves and Sons, Inc. (“Steves”) filed a claim against JWI in the U.S. District Court for the Eastern District of Virginia, Richmond Division (“Eastern District of Virginia”). The complaint alleges that our acquisition of CMI, together with subsequent price increases and other alleged acts and omissions, violated antitrust laws and constituted a breach of contract, and breach of warranty. The complaint seeks declaratory relief, ordinary and treble damages, and injunctive relief, including divestiture of certain assets acquired in the CMI acquisition.
On February 15, 2018, a jury in the Eastern District of Virginia returned a verdict that was unfavorable to JWI with respect to Steves’ claims that our acquisition of CMI violated Section 7 of the Clayton Act and that JWI breached the supply agreement between the parties. The verdict awards Steves $12,151,873 for past damages under both the Clayton Act and breach of contract claims and $46,480,581 in future lost profits under the Clayton Act claim. We expect that Steves will be required to elect to recover its past damages either under the Clayton Act claims or the contract claims, but not both. If a judgment is entered under the Clayton Act, any damages awarded will be trebled. In addition, if a judgment is entered under either theory in accordance with the verdict, Steves will be entitled to an award of attorney’s fees, which amounts have not yet been quantified. We have asserted a position that, because future lost profits were awarded, Steves is not permitted to pursue its claim for divestiture of certain assets acquired in the CMI acquisition. The court has not yet ruled on this issue.
We intend to vigorously oppose entry of an adverse judgment, and to appeal any adverse judgment that may be entered. We continue to believe that Steves’ claims lack merit, Steves’ damages calculations are speculative and excessive, and Steves is not entitled in any event to the extraordinary remedy of divestiture. We believe that multiple pretrial and trial rulings were erroneous and improperly limited the Company’s defenses, and that judgment in accordance with the verdict would be improper for several reasons under applicable law. Accordingly, we do not believe that a lossstatements included elsewhere in this matter is probable and estimable, and therefore, we have not accrued a reserve for this loss contingency. However, if a judgment is entered in accordance with the verdict and is ultimately upheld after exhaustion of our appellate remedies, it could have a material adverse effect on our financial position, operating results, or cash flows, particularly for the reporting period in which a loss is recorded. Because the operations acquired from CMI have been fully integrated into the Company’s other operations, divestiture of those operations would be difficult if not impossible and therefore it is not possible to estimate the cost of any final divestiture order or the extent to which such an order would have a material adverse effect on our financial position, operating results or cash flows.Form 10-K.
During the course of the proceedings in the Eastern District of Virginia, we discovered certain facts that led us to conclude that Steves, its principals, and certain former employees of the Company had misappropriated Company trade secrets, violated the terms of various agreements between the Company and those parties, and violated other laws. We have asserted claims against certain of those parties in the Eastern District of Virginia and in the District Court of Bexar County, Texas, and are pursuing those claims vigorously. Our claims against Steves and others in the Eastern District of Virginia related to misappropriation of trade secrets remain pending and are set for trial in April 2018. Our other claims remain pending in Bexar County, Texas, and are set for trial in October 2018.
Item 4 - Mine Safety Disclosures.
Not applicable.
PART II - OTHER INFORMATION
Item 5 - Market for Registrant'sRegistrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.Securities
MARKET INFORMATION
Market Information and Holders
Our common stockCommon Stock has been listed and traded on the NYSE under the symbol “JELD” since January 27, 2017. Prior to that time, there was no public trading market for our stock.
The following table sets forth the high and low sale prices per share of our common stock on the NYSE for the periods indicated:
|
| | | | | | |
| | Market Price |
Fiscal Year 2017 | | High | | Low |
First Quarter (from January 27, 2017) | | $ | 33.42 |
| | $24.95 |
Second Quarter | | $ | 34.95 |
| | $29.65 |
Third Quarter | | $ | 35.93 |
| | $27.61 |
Fourth Quarter | | $ | 40.25 |
| | $34.05 |
HOLDERS
As of February 27, 2018,16, 2024, there were 703approximately 1,374 shareholders of record of our common stock.Common Stock. The number of record holders does not include a substantially greater number of holders whose shares are held of record in nominee or “street name” accounts through banks, brokers, and other financial institutions.
STOCK PERFORMANCE GRAPH
Stock Performance Graph
The following graph depicts the total return to shareholders from January 27, 2017, the date our common shares became listed on the NYSE,December 31, 2018 through December 31, 2017,2023, relative to the performance of the Standard & Poor's 500 Index and the Standard & Poor's 1500 Building Products Index. The graph assumes an investment of $100 in our common stockCommon Stock and each index on January 27, 2017,December 31, 2018, and the reinvestment of dividends paid since that date. The stock performance shown in the graph is not necessarily indicative of future price performance.
*$100 invested on 1/27/1712/31/18 in stock or 12/31/16 in index, including reinvestment of dividends.
Fiscal year ended December 31.
Copyright© 20182023 Standard & Poor's, a division of S&P Global. All rights reserved.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2018 | | | | | | | | 12/31/2019 | | | | | | | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 | | 12/31/2023 |
JELD-WEN Holding, Inc. | $100.00 | | | | | | | | $164.74 | | | | | | | | $178.47 | | $185.5 | | $67.91 | | $132.86 |
S&P 500 | $100.00 | | | | | | | | $131.49 | | | | | | | | $155.68 | | $200.37 | | $164.08 | | $207.21 |
S&P 1500 Building Products Index | $100.00 | | | | | | | | $142.18 | | | | | | | | $182.48 | | $267.75 | | $205.19 | | $295.93 |
|
| | | | | | | | | | |
| | 1/27/2017 | | 3/31/2017 | | 6/30/2017 | | 9/30/2017 | | 12/31/2017 |
JELD-WEN Holding, Inc. | | $100.00 | | $125.77 | | $124.27 | | $135.99 | | $150.73 |
S&P 500 | | $100.00 | | $106.07 | | $109.34 | | $114.24 | | $121.83 |
S & P 1500 Building Products Index | | $100.00 | | $101.36 | | $106.76 | | $106.55 | | $110.00 |
Equity Compensation PlansEQUITY COMPENSATION PLANS
See “Item 12- Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters”Matters for the information required by Item 201(d) of Regulation S-K regarding equity compensation plans.
DIVIDENDSDividends
In November 2016, we paid an aggregate cash dividend of approximately $73.8 million to holders of our then-outstanding common stock, approximately $0.9 million to holders of our then-outstanding Class B-1 Common Stock, and approximately $307 million to holders of our then-outstanding Series A Convertible Preferred Stock. The payment to holders of our outstanding Series A Convertible Preferred Stock represented payment for (i) preferred dividends accrued from May 31, 2016 through November 3, 2016 and (ii) a dividend on an as-if-converted-to common basis based on the original principal amount of the Series A Convertible Preferred Stock investment plus preferred dividends accrued through May 30, 2016. In conjunction with our IPO, these securities converted into
shares of our Common Stock as described below in “Part II-Item 8. Financial Statements and Supplementary Data, Note 1 - Summary of Significant Accounting Policies, Stock Conversion and Initial Public Offering.”
We do not currently expect to pay any further cash dividends on our common stockCommon Stock for the foreseeable future. Instead, we intend to retain future earnings, if any, for the future operation and expansion of our business, and the repayment of debt.debt, and potentially for share repurchases. Any determination to pay dividends in the future will be at the discretion of our boardBoard of directorsDirectors and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws, and other factors that our boardBoard of directorsDirectors may deem relevant.
The terms of our Corporate Credit Facilities were amended in July 2015 and November 2016 to permit the cash dividends described above, but the covenants ofagreements governing our existing or future indebtedness may limit our ability to further pay dividends and make distributions to our shareholders. Our business is conducted through our subsidiaries and dividends from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations, and pay any dividends. Accordingly, our ability to pay dividends to our shareholders is dependent on the earnings and distributions of funds from our subsidiaries (which distributions may be restricted by the terms of our Corporate Credit Facilities and Senior Notes).
USE OF PROCEEDS FROM OUR PUBLIC OFFERING
On January 27, 2017, we sold an aggregate of 22,272,727 shares of our common stock at a price of $23.00 per share in our IPO. The offering closed on February 1, 2017, resulting in net proceeds of $472.4 million to us after deducting underwriters’ discounts and commissions of $32.0 million and other offering expenses of $7.9 million.
We used the proceeds to us from the IPO as follows: (i) to pay fees and expenses of approximately $7.9 million in connection with the IPO, (ii) to repay $375.0 million of indebtedness outstanding under our Term Loan Facility; and (iii) working capital and other general corporate purposes, including sales and marketing activities, general and administrative matters, capital expenditures, and to invest in or acquire complementary businesses, products, services, technologies, or other assets.
We did not receive any of the proceeds from the sale of the shares of common stock sold in conjunction with our secondary offerings.
RECENT SALES OF UNREGISTERED SECURITIES
None.
Item 6 - Selected Financial Data[Reserved]
Our historical results are not necessarily indicative of the results expected for any future period. Since the year ended December 31, 2013, we have completed several acquisitions. See Acquisitions, included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations below. The results of these acquired entities are included in our consolidated statements of operations for the periods subsequent to the respective acquisition date. During the fourth quarter of 2016, we released a valuation allowance in the U.S. totaling $278.4 million resulting in an increase in tax benefit and net income for the period. During the fourth quarter of 2017, the Tax Act lowered our U.S. federal tax rate which reduced the valuation of our net deferred tax assets, resulting in an additional tax expense of approximately $21.1 million. In addition, the Tax Act resulted in an additional estimated foreign repatriation tax charge of $11.3 million. See Note 18 - Income Taxes for further detail. Additionally, the results for the years ended December 31, 2016, December 31, 2015 and December 31, 2014 were revised to reflect the correction of certain errors, misclassifications and other accumulated misstatements as described in Note 36 - Revision of Prior Period Financial Statements.
Not applicable.
The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (dollars in thousands, except per share data) |
Net revenues | | $ | 3,763,934 |
| | $ | 3,666,799 |
| | $ | 3,381,060 |
| | $ | 3,507,206 |
| | $ | 3,456,539 |
|
Income (loss) from continuing operations, net of tax | | 7,152 |
| | 376,714 |
| | 91,390 |
| | (78,275 | ) | | (74,197 | ) |
Income (loss) per common share from continuing operations | | | | | | | | | | |
Basic and Diluted | | $0.00 | | $(0.90) | | $(15.72) | | $(8.75) | | $(7.68) |
| | | | | | | | | | |
Cash dividends per common share | | $0.00 | | $4.09 | | $4.73 | | $0.00 | | $0.00 |
Other financial data: | | | | | | | | | | |
Capital expenditures | | $ | 63,049 |
| | $ | 79,497 |
| | $ | 77,687 |
| | $ | 70,846 |
| | $ | 85,689 |
|
Depreciation and amortization | | 111,273 |
| | 107,995 |
| | 95,196 |
| | 100,026 |
| | 104,650 |
|
Adjusted EBITDA(1) | | 437,613 |
| | 393,682 |
| | 310,986 |
| | 229,849 |
| | 153,210 |
|
Consolidated balance sheet data: | | | | | | | | | | |
Total assets | | $ | 2,862,940 |
| | $ | 2,536,046 |
| | $ | 2,182,373 |
| | $ | 2,184,059 |
| | $ | 2,290,897 |
|
Total debt | | 1,273,703 |
| | 1,620,035 |
| | 1,260,320 |
| | 806,228 |
| | 667,152 |
|
Redeemable convertible preferred stock | | — |
| | 150,957 |
| | 481,937 |
| | 817,121 |
| | 817,121 |
|
___________________________
| |
(1) | In addition to our consolidated financial statements presented in accordance with GAAP, we use Adjusted EBITDA to measure our financial performance. Adjusted EBITDA is a supplemental non-GAAP financial measure of operating performance and is not based on any standardized methodology prescribed by GAAP. Adjusted EBITDA should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities, or other measures determined in accordance with GAAP. Also, Adjusted EBITDA is not necessarily comparable to similarly titled measures presented by other companies. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by net revenues. |
We define Adjusted EBITDA as net income (loss), eliminating the impact of the following items: loss from discontinued operations, net of tax; gain on sale of discontinued operations, net of tax; equity earnings (loss) of non-consolidated entities; income tax; depreciation and amortization; interest expense, net; impairment and restructuring charges; gain (loss) on sale of property and equipment; share-based compensation expense; non-cash foreign exchange transaction/translation (income) loss; other non-cash items; other items; and costs related to debt restructuring, debt refinancing, and the Onex Investment.
We use this non-GAAP measure in assessing our performance in addition to net income (loss) determined in accordance with GAAP. We believe Adjusted EBITDA is an important measure to be used in evaluating operating performance because it allows management and investors to better evaluate and compare our core operating results from period to period by removing the impact of our capital structure (net interest income or expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, other non-operating items, and share-based compensation. Furthermore, the instruments governing our indebtedness use Adjusted EBITDA to measure our compliance with certain limitations and covenants. We reference this non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. In addition, executive incentive compensation is based in part on Adjusted EBITDA, and we base certain of our forward-looking estimates and budgets on Adjusted EBITDA.
We also believe Adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA eliminates the effect of certain items on net income and thus has certain limitations. Some of these limitations are: Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; Adjusted EBITDA does not reflect any income tax payments we are required to make and although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and Adjusted EBITDA does not reflect any cash requirements for such replacement. Other companies may calculate Adjusted EBITDA differently, and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
The following is a reconciliation of our net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA:
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (dollars in thousands) |
Net income (loss) | | $ | 10,791 |
| | $ | 377,181 |
| | $ | 90,918 |
| | $ | (84,109 | ) | | $ | (68,406 | ) |
Adjustments: | | | | | | | | | | |
Loss from discontinued operations, net of tax | | — |
| | 3,324 |
| | 2,856 |
| | 5,387 |
| | 5,863 |
|
Gain on sale of discontinued operations, net of tax | | — |
| | — |
| | — |
| | — |
| | (10,711 | ) |
Equity (earnings) loss of non-consolidated entities | | (3,639 | ) | | (3,791 | ) | | (2,384 | ) | | 447 |
| | (943 | ) |
Income tax (benefit) expense | | 138,603 |
| | (246,394 | ) | | (5,435 | ) | | 18,942 |
| | 1,142 |
|
Depreciation and amortization | | 111,273 |
| | 107,995 |
| | 95,196 |
| | 100,026 |
| | 104,650 |
|
Interest expense, net(a) | | 79,034 |
| | 77,590 |
| | 60,632 |
| | 69,289 |
| | 71,362 |
|
Impairment and restructuring charges(b) | | 13,057 |
| | 18,353 |
| | 31,031 |
| | 38,645 |
| | 44,413 |
|
Gain on sale of property and equipment | | (299 | ) | | (3,275 | ) | | (416 | ) | | (23 | ) | | (3,039 | ) |
Share-based compensation expense | | 19,785 |
| | 22,464 |
| | 15,620 |
| | 7,968 |
| | 5,665 |
|
Non-cash foreign exchange transaction/translation (income) loss | | (2,181 | ) | | 5,734 |
| | 2,697 |
| | (528 | ) | | (4,114 | ) |
Other non-cash items(c) | | 526 |
| | 2,843 |
| | 1,141 |
| | 2,334 |
| | (68 | ) |
Other items(d) | | 47,000 |
| | 30,585 |
| | 18,893 |
| | 20,278 |
| | 7,284 |
|
Costs relating to debt restructuring, debt refinancing, and the Onex investment(e) | | 23,663 |
| | 1,073 |
| | 237 |
| | 51,193 |
| | 112 |
|
Adjusted EBITDA | | $ | 437,613 |
| | $ | 393,682 |
| | $ | 310,986 |
| | $ | 229,849 |
| | $ | 153,210 |
|
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(a) | Interest expense for the year ended December 31, 2017 includes $6,097 related to the write-off of a portion of the unamortized debt issuance costs and original issue discount associated with the Term Loan Facility. |
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(b) | Impairment and restructuring charges consist of (i) impairment and restructuring charges that are included in our consolidated statements of operations plus (ii) additional charges of $1, $4,506, $9,687, $257, and $2,409, for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively. These additional charges are primarily comprised of non-cash changes in inventory valuation reserves, such as excess and obsolete reserves. For further explanation of impairment and restructuring charges that are included in our consolidated statements of operations, see Note 24 - Impairment and Restructuring Charges of Continuing Operations in our audited financial statements for the years ended December 31, 2017, 2016 and 2015.
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(c) | Other non-cash items include, among other things, (i) charges of $439, $357, $893, $2,496, and $0, for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively, relating to (1) the fair value adjustment for inventory acquired as part of the acquisitions referred to in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Acquisitions” and (2) the impact of a change in how we capitalize overhead expenses in our valuation of inventory. In addition, other non-cash items include charges of $2,153 for the out-of-period European warranty liability adjustment for the year ended December 31, 2016. |
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(d) | Other items include: (i) in the year ended December 31, 2017, (1) $34,178 in legal costs, (2) $4,176 in realized loss on hedges, (3) $3,484 in acquisition costs not core to business activity, (4) $2,202 in secondary offering costs, (5) $754in tax consulting fee, (6)$678 in legal entity consolidation costs, (7) $649 in taxes related to equity-based compensation (8) $578 in facility ramp down costs and (9) $(2,247) gain on settlement of contract escrow; (ii) in the year ended December 31, 2016, (1) $20,695 payment to holders of vested options and restricted shares in connection with the November 2016 dividend, (2) $3,721 of professional fees related to the IPO of our common stock, (3) $1,626 of acquisition costs, (4) $584 in legal costs associated with disposition of non-core properties, (5) $507 of dividend related costs, (6) $500 of costs related to the recruitment of executive management employees, (7) $450 in legal costs, and (8) $346 in Dooria plant closure costs; (iii) in the year ended December 31, 2015, (1) $11,446 payment to holders of vested options and restricted shares in connection with the July 2015 dividend described in Part II - Item 5. Dividends, (2) $5,510 related to a U.K. legal settlement, (3) $1,825 in acquisition costs, (4) $1,833 of recruitment costs related to the recruitment of executive management employees, and (5) $1,082 of legal costs related to non-core property disposal, partially offset by (6) ($5,678) of realized gain on foreign exchange hedges related to an intercompany loan; (iv) in the year ended December 31, 2014, (1) $5,000 legal settlement related to our ESOP plan, (2) $3,657 of legal costs associated with noncore property disposal, (3) $3,443 production ramp-down costs, (4) $2,769 of consulting fees in Europe, and (5) $1,250 of costs related to a prior acquisition; and (v) in the year ended December 31, 2013, (1) $2,869 of cash costs related to the delayed opening of our new Louisiana facility, (2) $774 of legal costs associated with non-core property disposal, (3) $582 related to the closure of our Marion, North Carolina facility, and (4) $458 of acquisition-related costs.
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(e) | Included in the year ended December 31, 2017 is a loss on debt extinguishment of $23,262 associated with the refinancing of our term loan. Included in the year ended December 31, 2014 is a loss on debt extinguishment of $51,036 associated with the refinancing of our 12.25% secured notes. |
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- 1 - Business and Item 1A- 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:
Overview and Background.•Company Overview. This section provides a general description of our Company and operatingreportable 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 and Background
We are one of the world’s largest door and window manufacturers, and we hold a leading position by net revenues in the majorityglobal designer, manufacturer, and distributor of the countries and markets we serve. We design, produce, and distribute an extensive range ofhigh performance interior and exterior doors, wood, vinyl, and aluminum windows, and related building products, for use inserving the new construction and R&R of residential homes and, to a lesser extent, non-residential buildings.
sectors.
We operate 123 manufacturing and distribution facilities in 1915 countries, located primarily in North America Europe, and Australia.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.
In October 2011, Onex acquired a majority of the combined voting power in the Company through the acquisition of convertible debt and convertible preferred equity.
In February 2017, we closed on the offering of 28.75 million shares of our common stock at a public offering price of $23.00, resulting in net proceeds of $472.4 million after deducting underwriters’ discounts and commissions and other offering expenses. We used a portion of the net proceeds from the offering to repay $375.0 million of indebtedness outstanding under our Term Loan Facility, and used the remaining net proceeds for working capital and other general corporate purposes, including sales and marketing activities, general and administrative matters, capital expenditures, and to invest in or acquire complementary businesses, products, services, technologies, or other assets.
In May 2017, we completed a secondary public offering of 16.1 million shares of our common stock, substantially all of which were owned by Onex, including the exercise of the over-allotment option. Following the completion of the secondary offering, Onex owned approximately 45% of our common stock.
In November 2017, we completed a secondary public offering of 14.4 million shares of our common stock, substantially all of which were owned by Onex, including the exercise of the over-allotment option. Following the completion of the secondary offering, Onex owned approximately 31.2% of our common stock.
Business Segments
Our business is organized in geographic regions to ensure integration across operations serving common end markets and customers. We have threetwo reportable segments: North America (which includes limited activity in Chile and Peru), Europe, and Australasia.Europe. Financial information related to our business segments can be found in Note 1914 - Segment Information of our financial statements included elsewhere in this Form 10-K.
AcquisitionsDivestitures
In August 2015, we acquired Dooria, headquartered in Oslo, Norway. Dooria offers a complete range of doors, including interior, exterior, and specialty rated doors, in a wide variety of styles and is knownDuring 2021, the Company ceased the appeal process for its high qualitylitigation 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 innovative door designssubject to court approval, we believe the divestiture will occur within the next twelve months and options. Dooria is now part of our Europe segment. The acquisition of Dooria expanded our production capabilities and product offering in the Scandinavia region.
In August 2015, we acquired Aneeta, headquartered in Melbourne, Australia. Aneeta is an industry leading manufacturer and supplier of sashless windows in Australia and is now part of our Australasia segment. The acquisition of Aneeta expanded our product portfolio to include innovative window system offerings to customers in Australia as well as North America.
In September 2015, we acquired Karona, headquartered in Caledonia, Michigan. Karona offers a complete range of specialty stile and rail doors, including interior, exterior, and fire rated doorsqualifies for both the residential and non-residential markets, and is knownheld for its high quality and technical capabilities. Karona is now part of our North America segment. The acquisition of Karona fit our strategy to expand our capabilities and product offering in the North American specialty stile and rail market.
In October 2015, we acquiredsale accounting. We have reclassified certain assets and liabilities of LaCantina, headquarteredto assets held for sale in Oceanside, California. LaCantina is a manufacturer of folding and multislide door systems and is now part ofthe accompanying financial statements. We plan to continue reporting Towanda within our North America segment. The acquisition of LaCantina improved our position inoperations until the popular and growing market for wall systems by giving us additional resources, capacity, and a leading brand in this growing segment of the market.
In February 2016, we acquired Trend, headquartered in Sydney, Australia. Trenddivestiture is a leading manufacturer of doors and windows in Australia and is now part of our Australasia segment. The acquisition of Trend strengthened our market position in the Australian window market and expanded our product portfolio with new and innovative window designs.
In August 2016, we acquired the shares of Arcpac Building Products Limited, which includes its primary operating subsidiary Breezway, headquartered in Brisbane, Australia. Breezway is a manufacturer of louver window systems for the residential and commercial window markets. Breezway’s primary sales market is Australia and it also maintains a presence in Malaysia and Hawaii. The acquisition of Breezway is expected to strengthen our position in the Australian window market and expand our product portfolio with new and innovative window designs as well as other complementary products.
In June 2017, we acquired Mattiovi, headquartered in Finland. Mattiovi is a leading manufacturer of interior doors and door frames in Finland and is part of our Europe segment. The acquisition enhances our market position in the Nordic region, increases our product offering, and also provides us with additional door frame capacity to support growth in the region.
In August 2017, we acquired MMI Door, headquartered in Sterling Heights, Michigan. MMI Door is a leading provider of doors and related value-added services in the Midwest region of the U.S. and is part of our North America segment. The acquisition complements our North America door business and allows us to improve service offerings and lead times to our channel partners.
In August 2017, we acquired the Kolder Group, headquartered in Smithfield, Australia. Kolder is a leading Australian provider of shower enclosures, closet systems, and related building products, with leading positions in both the commercial and residential markets. Kolder is part of our Australasia segment. The acquisition significantly enhances our existing Australian capabilities in glass shower enclosures and built-in closet systems, and supports our strategy to build leadership positions in attractive markets.
We paid an aggregate of approximately $304.0 million in cash (net of cash acquired) for the 2015, 2016 and 2017 acquisitions.
In October 2017, we signed a definitive agreement to acquire Domoferm from holding company Domoferm International GmbH. Domoferm is a leading European provider of steel doors, steel door frames, and fire doors for commercial and residential
markets. Domoferm is based in Gänserndorf, Austria, with four manufacturing sites in Austria, Germany, and the Czech Republic. On February 19, 2018, we closed the transaction. Domoferm is now part of our Europe segment. We expect the acquisition to add approximately €110 million in annualized revenue in 2018.
In February 2018, we acquired A&L Windows Pty Ltd (“A&L”), a leading Australian manufacturer of residential aluminum windows and patio doors. A&L has a network of manufacturing facilities and showrooms across the eastern seaboard of Australia which we expect will deliver synergies through operational savings from the implementation of JEM and by leveraging the benefits of our combined supply chain. A&L is now part of our Australasia segment.
In February 2018, we signed a purchase agreement to acquire American Building Supply, Inc. (“ABS”), a premier supplier of value-added services for the millwork industry located in Sacramento, California. We expect the transaction to close in the first quarter of 2018, subject to customary closing conditions. ABS will be part of our North America segment.
finalized. For additional information on acquisition activity,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-Acquisitions. Discontinued Operations of our financial statements included elsewhere in this Form 10-K.
Factors and Trends Affecting Our Business
DriversComponents of Net Revenues
The key components of our net revenues include core net revenuesCore 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. Our core netNet revenues reported in our financial statements are impacted by the relative and fluctuating currency values in the geographies in which we operate, which we refer to as the impact offrom 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, and 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;
interest rate fluctuations for our customers•volatility in both debt and consumers;equity capital markets;
•increases in the cost of raw materials or any shortage in supplies or labor;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.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 new training centerscurriculum, in-field training and mobile training facilities;technologies to facilitate remote learning; and
•implementing channel initiatives to enhance our relationships with key channel partners and customers, including implementing the True BLU dealer management programoptimizing 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“Results of Operations”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 and net income.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 strategiesstrategy also includeincludes 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.
Changes in pricing trends for our products can have a material impact on our operations. During and immediately after the global financial crisis, our net revenues were negatively impacted by decreased demand and an increasingly competitive environment, resulting in unfavorable pricing trends, particularly in the North American door market. Furthermore, prior
Back to our current senior executive team joining the Company, we often pursued a strategy in North America of pricing our products on an incremental contribution margin basis in an effort to grow volumes and generate operating leverage, which often led to competing on price and an inadequate return on our invested capital. In early 2014, our management team began to strategically change our pricing strategy in several key areas. First, we focused on making strategic pricing decisions based on analysis of customer and product level profitability to restore profitability to underperforming lines of business. Second, we increased our emphasis on pricing optimization. As a result, our operations during 2014 and 2015 benefited from improved pricing, particularly in North America, where pricing returned to close to pre-crisis levels in some product lines across some market channels. Going forward, if the housing market continues to grow and economic factors remain positive, we believe that we will continue to benefit from a positive pricing environment. However, we do not believe the future benefits will be as significant as the pricing improvements we experienced during the 2013 to 2015 period.top Cost Reduction and Productivity Initiatives
Prior to the ongoing operational transformation being executed by ourOur 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 management team has a proven track record of implementing operational excellence programs at some of the world’s leading industrialvarious large, global manufacturing businesses, and we believe the same successes can be realized at JELD-WEN. Key areas of focus of our operational excellence, programproductivity, 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 strategic global sourcingvalue-added engineering;
•investing in logistics optimization programs to reduce freight costs and value-added re-engineering of components, in part by leveragingincrease throughput;
•redesigning our significant spendsupply chain network to reduce lead times and the global nature of our purchases;optimize inventory levels to increase cash flow; and
•reducing warranty costs by improving quality.
We are in the early stages of implementingcontinue to implement our strategic cost-reduction and productivity initiatives including JEM, to develop the culture and processes of operational excellence and continuous improvement. These cost reduction initiatives, as well aswhich 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 vinyl extrusions, glass, aluminum, wood, steel, plastics,glass, fiberglass, aluminum and other compositesvinyl 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 productsgoods 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 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. 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 for some raw materials with long deliveryGlobal supply markets and supply chains have been impacted by certain events, resulting in shortages and extended lead times such as steel, as we work through prior shipmentsimpacting our operations and take deliveryprofitability. We continue to apply a number of new orders.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. In the year ended December 31, 2017 compared to the year ended December 31, 2016, the depreciation of the U.S. dollar relative to the reporting currencies of our foreign subsidiaries resulted in higher reported results in such foreign reporting entities. In particular, the exchange rates used to translate our foreign subsidiaries’ financial results for the year ended December 31, 2017 compared to the year ended December 31, 2016 reflected, on average, the U.S. dollar weakening against the Euro, Australian dollar, and Canadian dollar by 2%, 3%, and 2%, respectively. See Item 1A- 1A - Risk Factors- Risks Relating to Our Business and Industry, Item 1A- 1A - Risk Factors- Exchange rate fluctuations may impact our business, financial condition, and results of operations, and Item 7A- 7A - Quantitative and Qualitative Disclosures About Market Risk- Exchange Rate Risk.
Public Company Costs39
Following our IPO, we have incurred, and will continue
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 allboth 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,America; and the U.K.; and
•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.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, including payroll taxes, repair and maintenance, depreciation, utility, rent and warranty expenses, outbound freight, and insurance and benefits, supervision and tax expenses. Detail for each of these items is provided below.
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 glass, wood, wood composites, wood components, doors,steel, glass, internally produced door facings, door parts,skins, fiberglass compound, hardware, vinyl extrusions, steel, fiberglass, packaging materials, adhesives, resinspetroleum-based products such as resin and other chemicals, core material,binders, as well as aluminum and aluminumvinyl 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- 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.
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◦ | 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. |
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◦ | Depreciation includes depreciation expense associated with our production assets and plants. |
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◦ | 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. |
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◦ | Warranty expenses represent all costs related to servicing warranty claims and product issues and are mostly related to our window products sold in the U.S. and Canada. |
•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.
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◦ | Insurance and benefit costs are the expenses relating to our insurance programs, health benefits, retirement benefit programs (including the pension plan), and other benefits that are not included in direct labor and benefits costs. |
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◦ | 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. |
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◦ | 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. |
•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,General, and administrative expensesAdministrative 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.
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.
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 and not fixed 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
Goodwill Impairment
Goodwill impairment consists of goodwill impairment charges associated with our general and administrative expensesEurope reporting unit in the year ended December 31, 2022. For more information, refer to increase in absolute dollars due to the anticipated growth Note 6 - Goodwill of our businessconsolidated financial statements included in this Form 10-K.
Restructuring and related infrastructure as well as legal, accounting, insurance, investor relations, and other costs associated with becoming a public company.Asset Related Charges
Impairment and Restructuring Costs
Impairment and restructuring costscharges, 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 then-outstanding credit facilities (andand debt securities)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 applicablerelated facility using the effective interest method. For additional details, see Note 1612 - Notes Payable and Long-Term Debt inof our financial statements for the year ended December 31, 20172023 included elsewhere in this Form 10-K.
Other Income, (Expense), Net
Other income, (expense), net, includes profitincome and losses related to various miscellaneous non-operating expenses including loss on extinguishment expenses. For more information, refer to Note 22 - Other Income, Net of debt and certain foreign currency related gains and losses.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
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. We record interest relatedFor more information, refer to unrecognized tax benefits in income tax expense. As of December 31, 2017,Note 15 - Income Taxes to our federal, state, and foreign net operating loss (“NOL”) carryforwards were $1,450.1 million in the aggregate and $106.5 million of such NOL carryforwards do not expire.
The Tax Act passed in December 2017 had significant effects on ourconsolidated financial statements some of which we are still quantifying. In accordance with Staff Accounting Bulletin #118 issued by the SEC in December 2017 immediately following the passage of the Tax Act, we have made provisional estimates for certain direct and indirect effects of the Tax Act based on information available to us. We will finalize our accounting for the effects of the Tax Act over the twelve-month period ending December 22, 2018. Any adjustments to our provisional estimates will be recorded as a component of continuing operations. For additional details, see Note 18 - Income Taxes in our financial statements for the year ended December 31, 2017 included elsewhere 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. The results for
We present several financial metrics in “Core” terms, such as Core Revenue, which excludes the years ended December 31, 2016impact of foreign exchange, acquisitions and December 31, 2015 have been revised to reflectdivestitures completed in the correctionlast twelve months. We believe Core Revenue assists management, investors, and analysts in understanding the organic performance of certain errors and other accumulated misstatements as described in Note 36 - Revision of Prior Period Financial Statements.our operations.
Comparison of the Year Ended December 31, 20172023 to the Year Ended December 31, 20162022
| | | December 31, 2017 | | December 31, 2016 |
(dollars in thousands) | | % of Net Revenues | | % of Net Revenues |
| Year Ended | | | Year Ended |
| December 31, 2023 | | | December 31, 2023 | | December 31, 2022 |
(amounts in thousands) | | (amounts in thousands) | | | % of Net Revenues | | | % of Net Revenues |
Net revenues | $ | 3,763,934 |
| | 100.0 | % | | $ | 3,666,799 |
| | 100.0 | % | Net revenues | $ | 4,304,334 | | | 100.0 | | 100.0 | % | | $ | 4,543,808 | | | 100.0 | | 100.0 | % |
Cost of sales | 2,915,736 |
| | 77.5 | % | | 2,892,248 |
| | 78.9 | % | Cost of sales | 3,471,713 | | | 80.7 | | 80.7 | % | | 3,757,888 | | | 82.7 | | 82.7 | % |
Gross margin | 848,198 |
| | 22.5 | % | | 774,551 |
| | 21.1 | % | Gross margin | 832,621 | | | 19.3 | | 19.3 | % | | 785,920 | | | 17.3 | | 17.3 | % |
Selling, general and administrative | 585,074 |
| | 15.5 | % | | 565,619 |
| | 15.4 | % | Selling, general and administrative | 655,280 | | | 15.2 | | 15.2 | % | | 654,077 | | | 14.4 | | 14.4 | % |
Impairment and restructuring charges | 13,056 |
| | 0.3 | % | | 13,847 |
| | 0.4 | % |
Goodwill impairment | | Goodwill impairment | — | | | — | % | | 54,885 | | | 1.2 | % |
Restructuring and asset related charges | | Restructuring and asset related charges | 35,741 | | | 0.8 | % | | 17,622 | | | 0.4 | % |
Operating income | 250,068 |
| | 6.6 | % | | 195,085 |
| | 5.3 | % | Operating income | 141,600 | | | 3.3 | | 3.3 | % | | 59,336 | | | 1.3 | | 1.3 | % |
Interest expense, net | 79,034 |
| | 2.1 | % | | 77,590 |
| | 2.1 | % | Interest expense, net | 72,258 | | | 1.7 | | 1.7 | % | | 82,505 | | | 1.8 | | 1.8 | % |
Other expense (income) | 25,279 |
| | 0.7 | % | | (12,825 | ) | | (0.3 | )% |
Income before taxes, equity earnings and discontinued operations | 145,755 |
| | 3.9 | % | | 130,320 |
| | 3.6 | % |
Income tax expense (benefit) | 138,603 |
| | 3.7 | % | | (246,394 | ) | | (6.7 | )% |
Loss on extinguishment of debt | | Loss on extinguishment of debt | 6,487 | | | 0.2 | % | | — | | | — | % |
Other income, net | | Other income, net | (25,719) | | | (0.6) | % | | (53,433) | | | (1.2) | % |
Income from continuing operations before taxes | | Income from continuing operations before taxes | 88,574 | | | 2.1 | % | | 30,264 | | | 0.7 | % |
Income tax expense | | Income tax expense | 63,339 | | | 1.5 | % | | 18,041 | | | 0.4 | % |
Income from continuing operations, net of tax | 7,152 |
| | 0.2 | % | | 376,714 |
| | 10.3 | % | Income from continuing operations, net of tax | 25,235 | | | 0.6 | | 0.6 | % | | 12,223 | | | 0.3 | | 0.3 | % |
Equity earnings of non-consolidated entities | 3,639 |
| | 0.1 | % | | 3,791 |
| | 0.1 | % |
Loss from discontinued operations, net of tax | — |
| | — | % | | (3,324 | ) | | (0.1 | )% |
Gain on sale of discontinued operations, net of tax | | Gain on sale of discontinued operations, net of tax | 15,699 | | | 0.4 | % | | — | | | — | % |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | 21,511 | | | 0.5 | % | | 33,504 | | | 0.7 | % |
Net income | $ | 10,791 |
| | 0.3 | % | | $ | 377,181 |
| | 10.3 | % | Net income | $ | 62,445 | | | 1.5 | | 1.5 | % | | $ | 45,727 | | | 1.0 | | 1.0 | % |
Consolidated Results
Net Revenues – Net revenues increased $97.1decreased $239.5 million, or 2.6%5.3%, to $3,763.9$4,304.3 million in the year ended December 31, 20172023 from $3,666.8$4,543.8 million in the year ended December 31, 2016.2022. The increasedecrease was driven by a decrease in net revenues was primarilyCore Revenues of 5% and a nominal impact from foreign exchange. Core Revenues decreased 5% due to our recent acquisitions which provided a 2% increase as well as a favorable foreign exchange impact of 1%. Our core net revenues were unchanged with a 1% benefit from pricing10% decrease in volume/mix, partially offset by a 1% decrease in volume/mix.5% benefit from price realization.
Gross Margin – Gross margin increased $73.6$46.7 million, or 9.5%5.9%, to $848.2$832.6 million in the year ended December 31, 20172023 from $774.6$785.9 million in the year ended December 31, 2016.2022. Gross margin as a percentage of net revenues was 22.5%19.3% in the year ended December 31, 20172023 and 21.1%17.3% in the year ended December 31, 2016.2022. The increase in gross margin and gross margin percentage was due primarily to favorable pricing, price/cost, savings initiatives and contribution from recent acquisitions, partially offset by operational inefficienciesaccelerated depreciation in our North American windows business.America from reviews of equipment capacity optimization.
SG&A Expense – SG&A expense increased $19.5$1.2 million, or 3.4%0.2%, to $585.1$655.3 million in the year ended December 31, 20172023 from $565.6$654.1 million in the year ended December 31, 2016.2022. SG&A expense as a percentage of net revenues was 15.5% forincreased to 15.2% in the year ended December 31, 2017 and 15.4% for2023 from 14.4% in the year ended December 31, 2016.2022. The increase in SG&A expense was primarily due to increased professional fees, costs associated with our IPOperformance-based variable compensation expenses and secondary offerings, SG&A expense associated with our recent acquisitions, and increased wages,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 decreasereduction in share-based compensation associated with the 2016 Dividend.headcount and lower bad debt expense in our North America segment due to improved collections.
Goodwill Impairment and Restructuring Charges – Impairment and restructuringGoodwill impairment charges decreased $0.8 million, or 5.7%, to $13.1of $54.9 million in the year ended December 31, 2017 from $13.82022 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, 2016. The charges in the year ended December 31, 2017 consisted primarily of a reduction in workforce in our North American segment as well as ongoing restructuring costs in our Europe segment. The charges for the year ended December 31, 2016 consisted primarily of ongoing personnel restructuring in our Europe and North America segment.
Interest Expense, Net – Interest expense, net2023 increased $1.4 million, or 1.9%, to $79.0102.8% from $17.6 million in the year ended December 31, 2017 from $77.62022. 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, 2016. The increase was primarily due to interest expense resulting2023 from the write-off of a portion of the unamortized debt issuance costs and original issue discount totaling approximately $6.1 million in connection with the repayment of $375.0 million of outstanding term loans with proceeds from our IPO. In addition, interest expense increased due to higher long-term debt levels for the first month of the period as a result of borrowings of $375.0 million under our Term Loan Facility, partially offset by reductions in the applicable margin which became effective in March 2017 and December 2017.
Other Expense (Income) – Other expense increased $38.1 million, to a $25.3 million expense in the year ended December 31, 2017 from income of $12.8$82.5 million in the year ended December 31, 2016.2022. The expensedecrease 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, 2017 was primarily of loss on the extinguishment of debt of $23.32023 from $53.4 million associated with our Term Loan, foreign currency losses of $10.4 million, partially offset by a contract settlement of $2.2 million and legal settlement income of $2.5 million. Income in the year ended December 31, 2016 primarily consisted of $8.4 million received in a confidential settlement agreement on a commercial matter in our North America segment.
Income Taxes – On December 22, 2017, the Tax Act was enacted in the U.S. The specific provisions of the Tax Act had both direct and indirect impacts on our 2017 results and will continue to materially affect our financial results in the future. The direct impacts were due primarily to the change in the U.S. corporate2022. Other income, tax rate from 35% to 21% for tax years beginning after December 31, 2017 and the one-time deemed repatriation tax. As a result of the lowering of the U.S. federal tax rate, we revalued our net deferred tax assets in the U.S. reflecting the lower expected benefit in the U.S. in the future. This revaluation resulted in additional non-cash tax expense totaling approximately $21.1 million. The one-time deemed repatriation tax, which effectively subjected the Company’s net aggregate historic foreign earnings to taxation in the U.S., resulted in a further tax charge of $11.3 million. While this repatriation tax is measured as of December 31, 2017, taxpayers can pay the tax over an 8-year period resulting in an increase to our non-current liabilities.
During the fourth quarter, the Company undertook certain transactions which involved the repatriation of certain earnings from foreign subsidiaries. While these transactions were not undertaken as a direct result of tax reform, the U.S. tax implications were heavily impacted due to the timing of the transactions and the measurement dates as outlined in the Tax Act. We have recorded a net increase to tax expense of $65.8 million related to these transactions and their impacts under the Tax Act.
While we have recorded provisional estimates of the tax impact of the above transactions as of December 31, 2017 based on information available to us, we have not yet completed our full analysis of the net effects of the Tax Act. The final net effects of the Tax Act may differ, possibly materially, due to many factors including, among other things, i) adjustments to historic foreign earnings and profits or the associated tax credit pools which are significant factors in the calculation of the repatriation tax, ii) changes in interpretations and assumptions that we have made, and iii) related accounting policy decisions we may take. Most significantly, definitive guidance and regulations surrounding the implementation of the provisions in the Tax Act and, specifically, the interactions of these provisions with the other transactions outlined above have not been issued to date. This guidance, once issued, may materially affect our conclusions regarding the net related effects of the Tax Act on our financial statements. We will complete our analysis over a one-year measurement period as outlined in Staff Accounting Bulletin #118 issued by the SEC in December 2017, and any adjustments during this measurement period will be recorded in earnings from continuing operations.
Income tax expense in the year ended December 31, 2017 was $138.62023 primarily consisted of recovery of the JW Australia transition services costs incurred of $8.3 million, comparedincome 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 $246.4$4.3 million settlement loss associated with our U.S. defined benefit pension plan. Other income, net in the year ended December 31, 2016.2022 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, 20172023 was 95.1%71.5% compared to an effective tax rate of (189.1)%59.6% in the year ended December 31, 2016.2022. The prior yeareffective tax benefit of $246.4 million wasrate increased primarily due primarily to the impacts of the $32.7 million net release 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 valuation allowanceconsolidated financial statements included in this Form 10-K.
Gain on Sale of $236.5Discontinued 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.
Comparison of the Year Ended December 31, 20162022 to the Year Ended December 31, 20152021
| | | December 31, 2016 | | December 31, 2015 |
| December 31, 2022 | |
| December 31, 2022 | |
| December 31, 2022 | | | December 31, 2021 |
(dollars in thousands) | | % of Net Revenues | | % of Net Revenues | (dollars in thousands) | | % of Net Revenues | | % of Net Revenues |
Net revenues | $ | 3,666,799 |
| | 100.0 | % | | $ | 3,381,060 |
| | 100.0 | % | Net revenues | $ | 4,543,808 | | | 100.0 | | 100.0 | % | | $ | 4,181,690 | | | 100.0 | | 100.0 | % |
Cost of sales | 2,892,248 |
| | 78.9 | % | | 2,721,341 |
| | 80.5 | % | Cost of sales | 3,757,888 | | | 82.7 | | 82.7 | % | | 3,358,773 | | | 80.3 | | 80.3 | % |
Gross margin | 774,551 |
| | 21.1 | % | | 659,719 |
| | 19.5 | % | Gross margin | 785,920 | | | 17.3 | | 17.3 | % | | 822,917 | | | 19.7 | | 19.7 | % |
Selling, general and administrative | 565,619 |
| | 15.4 | % | | 505,910 |
| | 15.0 | % | Selling, general and administrative | 654,077 | | | 14.4 | | 14.4 | % | | 604,514 | | | 14.5 | | 14.5 | % |
Impairment and restructuring charges | 13,847 |
| | 0.4 | % | | 21,342 |
| | 0.6 | % |
Goodwill impairment | | Goodwill impairment | 54,885 | | | 1.2 | % | | — | | | — | % |
Restructuring and asset related charges | | Restructuring and asset related charges | 17,622 | | | 0.4 | % | | 2,556 | | | 0.1 | % |
Operating income | 195,085 |
| | 5.3 | % | | 132,467 |
| | 3.9 | % | Operating income | 59,336 | | | 1.3 | | 1.3 | % | | 215,847 | | | 5.2 | | 5.2 | % |
Interest expense, net | 77,590 |
| | 2.1 | % | | 60,632 |
| | 1.8 | % | Interest expense, net | 82,505 | | | 1.8 | | 1.8 | % | | 76,788 | | | 1.8 | | 1.8 | % |
Other expense (income) | (12,825 | ) | | (0.3 | )% | | (14,120 | ) | | (0.4 | )% |
Income before taxes, equity earnings and discontinued operations | 130,320 |
| | 3.6 | % | | 85,955 |
| | 2.5 | % |
Income tax benefit | (246,394 | ) | | (6.7 | )% | | (5,435 | ) | | (0.2 | )% |
Other income, net | | Other income, net | (53,433) | | | (1.2) | % | | (13,241) | | | (0.3) | % |
Loss on extinguishment of debt | | Loss on extinguishment of debt | — | | | — | % | | 1,342 | | | — | % |
Income before taxes | | Income before taxes | 30,264 | | | 0.7 | % | | 150,958 | | | 3.6 | % |
Income tax expense | | Income tax expense | 18,041 | | | 0.4 | % | | 19,636 | | | 0.5 | % |
Income from continuing operations, net of tax | 376,714 |
| | 10.3 | % | | 91,390 |
| | 2.7 | % | Income from continuing operations, net of tax | 12,223 | | | 0.3 | | 0.3 | % | | 131,322 | | | 3.1 | | 3.1 | % |
Equity earnings of non-consolidated entities | 3,791 |
| | 0.1 | % | | 2,384 |
| | 0.1 | % |
Loss from discontinued operations, net of tax | (3,324 | ) | | (0.1 | )% | | (2,856 | ) | | (0.1 | )% |
| Income from discontinued operations, net of tax | |
Income from discontinued operations, net of tax | |
Income from discontinued operations, net of tax | | 33,504 | | | 0.7 | % | | 37,500 | | | 0.9 | % |
Net income | $ | 377,181 |
| | 10.3 | % | | $ | 90,918 |
| | 2.7 | % | Net income | $ | 45,727 | | | 1.0 | | 1.0 | % | | $ | 168,822 | | | 4.0 | | 4.0 | % |
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.
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, re-priced,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. Our affiliates
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, (expense).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 will beis 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.
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such assetsasset 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.
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.exist. Current accounting guidance provides an entity the option to perform a qualitative assessment to determine whether it is more likely than notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test.amount. If this is the case, the two-step goodwill impairment test is required. Ifwe do not perform a qualitative assessment, or if we determine that it is more likely than not that the fair value of a reporting is greater than its carrying amount, the two-step goodwill impairment test is not required.
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
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 accrued income taxes payableother current liabilities in the consolidated balance sheets.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.
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.
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 pricingoption-pricing model to determine the compensation expense for stock appreciation rights.options. The compensation expense for RSURSUs 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, and 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. 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.
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 0.00%0% which is consistent with the expected dividends to be paid on common stock.
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.