This MD&A contains forward-looking statements that involve risks and uncertainties. Please see "Forward-Looking Statements" in Item 1- Business and Item 1A- Risk Factors in this Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under Item 1A- Risk Factors and included elsewhere in this Form 10-K. This MD&A is a supplement to our financial statements and notes thereto included elsewhere in this 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. This section provides a general
description
of our Company and reportable segments, business and industry trends, our key business strategies and background information on other matters discussed in this MD&A. • Consolidated Results of Operations and Operating Results by Business Segment. This section provides our analysis and outlook for the significant line items on our consolidated statements of
operations,
as well as other information that we deem meaningful to an understanding of our results of operations on both a
consolidated
basis and a business segment basis. • Liquidity and Capital Resources. This section contains an overview of our financing arrangements and provides an analysis of
trends and
uncertainties affecting liquidity, cash requirements for our business and sources and uses of our cash. • Critical Accounting Policies and Estimates. This section
discusses
the accounting policies that we consider important to the
evaluation
and reporting of our financial condition and results of
operations,
and whose application requires significant judgments or a complex estimation process. 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 majority of the countries and markets we serve. We design, produce and distribute an extensive range of interior and exterior doors, wood, vinyl and aluminum windows, and related products for use in the new construction, R&R of residential homes and, to a lesser extent, non-residential buildings. We operate manufacturing and distribution facilities in approximately 20 countries, located primarily inNorth America ,Europe , andAustralia . For many product lines, our manufacturing processes are vertically integrated, enhancing our range of 43
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capabilities, our ability to innovate, and our quality control as well as providing supply chain, transportation, and working capital savings. InOctober 2011 , certain funds managed by affiliates of Onex acquired a majority of the combined voting power in the Company through the acquisition of convertible debt and convertible preferred equity. InFebruary 2017 , we closed on the IPO of 28.75 million shares of our common stock at a public offering price of$23.00 , resulting in net proceeds to us of$472.4 million after deducting underwriters' discounts and commissions and other offering expenses. We used a portion of the net proceeds from the IPO 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 andNovember 2017 , we completed secondary public offerings of 16.1 million and 14.4 million shares, respectively, of our Common Stock, substantially all of which were owned by Onex. As ofDecember 31, 2019 , Onex owned approximately 32.6% of our outstanding shares of Common Stock. Business Segments Our business is organized in geographic regions to ensure integration across operations serving common end markets and customers. We have three reportable segments:North America (which includes limited activity inChile ),Europe , andAustralasia . Financial information related to our business segments can be found in Note 18 - Segment Information of our financial statements included elsewhere in this 10-K. Acquisitions InMarch 2019 , we acquiredVPI Quality Windows, Inc. , a leading manufacturer of vinyl windows, specializing in customized solutions for mid-rise multi-family, industrial, hospitality and commercial projects, primarily in the westernU.S. VPI is located inSpokane, Washington . VPI is now part of ourNorth America segment. We paid approximately$57.8 million in cash (net of cash acquired) for the acquisition of VPI. InApril 2018 , we acquired the assets of D&K, a long-standing supplier of cavity sliders to our Corinthian Doors business. D&K is part of ourAustralasia segment. InMarch 2018 , we acquired the remaining issued and outstanding shares and membership interests of ABS, headquartered inSacramento, California . ABS is a premier supplier of value-added services for the millwork industry. ABS is part of ourNorth America segment. InFebruary 2018 , we acquired A&L, a leading Australian manufacturer of residential aluminum windows and patio doors. A&L has a network of manufacturing facilities across the eastern seaboard ofAustralia , 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 part of ourAustralasia segment. InFebruary 2018 , we acquired Domoferm, headquartered in Gänserndorf,Austria . Domoferm is a leading European provider of steel doors, steel door frames, and fire doors for commercial and residential markets with four manufacturing sites inAustria ,Germany , and theCzech Republic . Domoferm is part of ourEurope segment. InAugust 2017 , we acquired theKolder 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 ourAustralasia 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. InAugust 2017 , we acquired MMI Door, headquartered inSterling Heights, Michigan . MMI Door is a leading provider of doors and related value-added services in the Midwest region of theU.S. and is part of ourNorth America segment. The acquisition complements ourNorth America door business and allows us to improve service offerings and lead times to our channel partners. InJune 2017 , we acquired Mattiovi, headquartered inFinland . Mattiovi is a leading manufacturer of interior doors and door frames inFinland and is part of ourEurope 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. 44
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We paid an aggregate of approximately$356.8 million in cash (net of cash acquired) for the 2017, 2018, and 2019 acquisitions. In addition, we assumed debt of approximately$70.6 million associated with our 2018 acquired companies. We assumed no debt in our 2017 or 2019 acquisitions. For additional information on our acquisition activity, see Note 2 - Acquisitions to our consolidated financial statements. Factors and Trends Affecting Our Business Components of Net Revenues The key components of our net revenues include core net revenues (which we define to include the impact of pricing and volume/mix, as discussed further under the heading, "Product Pricing and Volume/Mix" below), contribution from acquisitions made within the prior twelve months, and the impact of foreign exchange. Core net revenues reported in our financial statements are impacted by the fluctuating currency values in the geographies in which we operate, which we refer to as the impact of 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;
• 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;
• increases in the cost of raw materials or any shortage in supplies or labor; • 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.
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 centers and mobile training facilities; and • implementing channel initiatives to enhance our
relationships with
key channel partners and customers, including the True BLU dealer management program inNorth America . Product Pricing and Volume/Mix The price and mix of products that we sell are important drivers of our net revenues and net income. Under the heading "Results of Operations," references to (i) "pricing" refer to the impact of price increases or decreases, as applicable, for particular products between periods and (ii) "volume/mix" refer to the combined impact of both the number of products we sell in a particular period and the types of products sold, in each case, on net revenues. While we operate in competitive markets, pricing discipline is an important element of our strategy to achieve profitable growth through improved margins. Our strategies also include 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. 45
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Cost Reduction Initiatives Prior to the ongoing operational transformation being executed by our senior executive team, our operations were managed in a decentralized manner with varying degrees of emphasis on cost efficiency and limited focus on continuous improvement or strategic sourcing. Our senior management team has a proven track record of implementing operational excellence programs at some of the world's leading industrial manufacturing businesses, and we believe the same successes can be realized atJELD-WEN . Key areas of focus of our operational excellence and footprint rationalization programs include: • reducing labor, overtime, and waste costs by reducing
facility count
while optimizing manufacturing capacity and improving planning and manufacturing processes; • reducing or minimizing increases in material costs through strategic global sourcing and value-added re-engineering of components, in part by leveraging our significant spend and the global nature of our purchases;
• reducing warranty costs by improving quality; and
• a JEM-enabled facility rationalization and modernization
initiative
that will reduce overhead costs and complexity, while
increasing our
overall capacity and improving our service levels. We continue to implement our strategic initiatives under JEM to develop the culture and processes of operational excellence and continuous improvement. These cost reduction initiatives, which include plant closures and consolidations, headcount reductions, and 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, fiberglass, and other composites 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 products 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 costs to third party logistics providers to transport raw materials and work-in-process inventory to our manufacturing facilities and to deliver finished goods to our customers. Changes in freight rates and the availability of freight services can have a significant impact on our cost of goods sold. Freight costs have risen significantly due to a number of factors that have affected the supply and demand of trucking services including increased regulation, such as data logging of miles, increases in general economic activity, 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 ourNorth America andEurope 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 delivery lead times, such as steel, as we work through prior shipments and take delivery of new orders. Foreign Currency Exchange Rates We report our consolidated financial results inU.S. dollars. Due to our international operations, the weakening or strengthening of foreign currencies against theU.S. dollar can affect our reported operating results and our cash flows as we translate our foreign subsidiaries' financial statements from their reporting currencies intoU.S. dollars. In the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , the depreciation or appreciation of theU.S. dollar relative to the reporting currencies of our foreign subsidiaries resulted in higher or lower reported results in such foreign reporting entities. In particular, the exchange rates used to translate our foreign subsidiaries' financial results for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 reflected, on average, theU.S. dollar strengthened against the Euro, Australian dollar, and Canadian dollar by 6%, 8%, and 3%, respectively. See Item 1A- Risk Factors- Risks Relating to Our Business and Industry, Item 1A- Risk Factors- Exchange 46
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rate fluctuations may impact our business, financial condition, and results of operations, and Item 7A- Quantitative and Qualitative Disclosures About Market Risk- Exchange Rate Risk. Public Company Costs As a public company, we incur additional legal, accounting, board compensation, and other expenses that we did not previously incur, including costs associated withSEC reporting and corporate governance requirements, and other requirements associated with operating as a public company. These requirements include compliance with the Sarbanes-Oxley Act as well as other rules implemented by theSEC and the national securities exchanges. Our financial statements following our IPO reflect the impact of these expenses. 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 all of our geographic markets; • sales of a wide variety of windows for both residential and certain non-residential uses, to a broad group of wholesale and retail customers primarily inNorth America ,Australia , and theU.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. 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 components, doors, door facings, door parts, hardware, vinyl extrusions, steel, fiberglass, packaging materials, adhesives, resins and other chemicals, core material, and aluminum
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. The imposition of new tariffs on
imports, new
trade restrictions, or changes in tariff rates or trade
restrictions
may further impact material costs. See Item 7A- Quantitative and Qualitative Disclosures About Market Risk- Raw Materials Risk. • Direct Labor and Benefit Costs. Direct labor and benefit costs reflect a combination of production hours, average headcount, general wage levels, payroll taxes, and benefits provided to employees. Direct labor and benefit costs include wages, overtime, payroll taxes, and benefits paid to hourly employees at our facilities that are involved in the production and/or
distribution
of our products. These costs are generally managed by each facility and headcount is adjusted according to overall and seasonal production demand. We run multi-shift operations in many of our facilities to maximize return on assets and utilization. Direct labor and benefit costs fluctuate with headcount, but
generally tend
to increase with inflation due to increases in wages and health benefit costs. • Repair and Maintenance, Depreciation, Utility, Rent, and Warranty Expenses. • Repairs and maintenance costs consist of equipment and facility maintenance expenses, purchases of maintenance supplies, and the labor costs involved in performing maintenance on our equipment and facilities. • Depreciation includes depreciation expense associated with our production assets and plants. • Rent is predominantly comprised of lease costs for
facilities we
do not own as well as vehicle fleet and equipment lease costs. Facility leases are typically multi-year and may include increases tied to certain measures of inflation. 47
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Back to top • 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 theU.S. andCanada . • 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 that are not included in direct labor and benefits costs. • Supervision costs are the wages and bonus expenses
related to
plant managers. Both insurance and benefits and supervision expenses tend to be influenced by headcount and wage levels. • Tax costs are mostly payroll taxes for employees not included in
direct labor and benefit costs, and property taxes. Tax expenses are impacted by changes in tax rates, headcount and wage levels, and the number and value of properties owned. In addition, an appropriate portion of each of the insurance and benefits, supervision and tax expenses are allocated to SG&A expenses. Selling, general, and administrative expenses SG&A expenses consist primarily of research and development, sales and marketing, and general and administrative expenses. Research and Development. Research and development expenses consist primarily of personnel expenses related to research and development, consulting and contractor expenses, tooling and prototype materials, and overhead costs allocated to such expenses. Substantially all of our research and development expenses are related to developing new products and services and improving our existing products and services. To date, research and development expenses have been expensed as incurred, because the period between achieving technological feasibility and the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant. 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 our general and administrative expenses to increase in absolute dollars due to the anticipated growth of our business and related infrastructure as well as legal, accounting, insurance, investor relations, and other costs associated with being a public company. Impairment and Restructuring Costs Impairment and restructuring costs consist primarily of all salary-related severance benefits that are accrued and expensed when a restructuring plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable. In addition to salary-related costs, we incur other restructuring costs when facilities are closed or capacity is realigned within the organization. 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. 48
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Interest Expense, Net Interest expense, net relates primarily to interest payments on our then-outstanding credit facilities (and debt securities) as well as amortization of any original issue discount or debt issuance costs. Debt issuance costs are included as an offset to long-term debt in the accompanying consolidated balance sheets and are amortized to interest expense over the life of the applicable facility using the effective interest method. For additional details, see Note 15 - Long-Term Debt in our financial statements for the year endedDecember 31, 2019 included elsewhere in this 10-K. Other Income (Expense), Net Other income (expense), net includes profit and losses related to various miscellaneous non-operating expenses primarily relating to pension benefit expenses, gain on previously held shares of an equity investment, loss on extinguishment of debt, and certain foreign currency related gains and losses. 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 related to unrecognized tax benefits in income tax expense. As ofDecember 31, 2019 , ourU.S. federal, state, and foreign net operating loss ("NOL") carryforwards were$1,300.8 million in the aggregate and$87.0 million of such NOL carryforwards do not expire. The Tax Act passed inDecember 2017 had significant effects on our financial statements. In accordance with Staff Accounting Bulletin #118 issued by theSEC inDecember 2017 immediately following the passage of the Tax Act, we made provisional estimates for certain direct and indirect effects of the Tax Act for the year endedDecember 31, 2017 . In the fourth quarter of 2018, we completed our accounting for all of the enactment-date income tax effects of the Tax Act and included any adjustments as a component of income tax expense from continuing operations. The Tax Act subjects aU.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. We have elected to account for the impact of GILTI in the period in which it is incurred. For additional details, see Note 17 - Income Taxes in our financial statements for the year endedDecember 31, 2019 included elsewhere in this 10-K. Results of Operations The tables in this section summarize key components of our results of operations for the periods indicated, both inU.S. dollars and as a percentage of our net revenues. Certain percentages presented in this section have been rounded to the nearest whole number. Accordingly, totals may not equal the sum of the line items in the tables below. The results have been revised to reflect the correction of certain errors and other accumulated misstatements as described in Note 32 - Revision of Prior Period Financial Statements. 49
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Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 Year Ended December 31, 2019 December 31, 2018 % of Net % of Net (amounts in thousands) Revenues Revenues Net revenues$ 4,289,761 100.0 %$ 4,346,847 100.0 % Cost of sales 3,417,222 79.7 % 3,428,311 78.9 % Gross margin 872,539 20.3 % 918,536 21.1 % Selling, general and administrative 660,574 15.4 % 734,166 16.9 % Impairment and restructuring charges 21,551 0.5 % 17,328 0.4 % Operating income 190,414 4.4 % 167,042 3.8 % Interest expense, net 71,778 1.7 % 70,818 1.6 % Other income (1,409 ) - %
(34,887 ) (0.8 )% Income before taxes and equity earnings 120,045 2.8 % 131,111
3.0 % Income tax expense (benefit) 57,074 1.3 % (10,058 ) (0.2 )% Income from continuing operations, net of tax 62,971 1.5 % 141,169 3.2 % Equity earnings of non-consolidated entities - - % 738 - % Net income$ 62,971 1.5 %$ 141,907 3.3 % Consolidated Results Net Revenues - Net revenues decreased$57.1 million , or 1.3%, to$4,289.8 million in the year endedDecember 31, 2019 from$4,346.8 million in the year endedDecember 31, 2018 . The decrease was due to unfavorable foreign exchange impact of 3% and a decline in core revenue of 2%, partially offset by a 4% contribution from acquisitions. Core revenue decline consisted of a 4% decrease in volume/mix, offset by a 2% increase in price. Gross Margin - Gross margin decreased$46.0 million , or 5.0%, to$872.5 million in the year endedDecember 31, 2019 from$918.5 million in the year endedDecember 31, 2018 . Gross margin as a percentage of net revenues was 20.3% in the year endedDecember 31, 2019 and 21.1% in the year endedDecember 31, 2018 . The decrease in gross margin and gross margin percentage was due to increased costs related to manufacturing inefficiencies inNorth America and unfavorable volume/mix withinNorth America andAustralasia , partially offset by favorable pricing. SG&A Expense - SG&A expense decreased$73.6 million , or 10.0%, to$660.6 million in the year endedDecember 31, 2019 from$734.2 million in the year endedDecember 31, 2018 . SG&A expense as a percentage of net revenues was 15.4% for the year endedDecember 31, 2019 and 16.9% for the year endedDecember 31, 2018 . The decrease in SG&A expense was primarily due to a decrease of litigation contingency accruals of$76.5 million and reduction of acquisition and integration costs. Impairment and Restructuring Charges - Impairment and restructuring charges increased$4.2 million , or 24.4%, to$21.6 million in the year endedDecember 31, 2019 from$17.3 million in the year endedDecember 31, 2018 . The 2019 charges consisted primarily of plant consolidations in ourNorth America andAustralasia segments as well as severance costs across all segments and corporate. The 2018 charges consisted primarily of personnel restructuring costs in ourNorth America ,Europe , andAustralasia segments, as well as plant consolidations in ourNorth America andAustralasia segments. For more information, refer to Note 23 - Impairment and Restructuring Charges. Interest Expense, Net - Interest expense, net, increased$1.0 million , or 1.4%, to$71.8 million in the year endedDecember 31, 2019 from$70.8 million in the year endedDecember 31, 2018 . The increase was primarily due to increased borrowings during 2019. Other Income - Other income decreased$33.5 million , to income of$1.4 million in the year endedDecember 31, 2019 from income of$34.9 million in the year endedDecember 31, 2018 . The other income in the year endedDecember 31, 2019 was primarily due to foreign currency gains of$7.4 million , a gain on sale of business of$2.8 million and legal settlement income of$1.2 million , partially offset by pension expense of$10.7 million . Other income in the year endedDecember 31, 2018 was primarily due to a fair value adjustment of$20.8 million associated with our acquisition of the remaining shares outstanding of an equity investment, legal settlement income of$7.5 million and foreign currency gains of$11.3 million , partially offset by pension expense of$7.0 million . 50
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Income Taxes - Income tax expense in the year endedDecember 31, 2019 was$57.1 million , compared to tax benefit of$10.1 million in the year endedDecember 31, 2018 . The effective tax rate in the year endedDecember 31, 2019 was an expense of 47.5% compared to a benefit of 7.7% in the year endedDecember 31, 2018 . The 2019 tax expense was primarily due to the increases in valuation allowances associated with net operating losses and certain credits of$10.1 million and$4.5 million for the reclassification of an other comprehensive income balance as income tax expense to relieve the disproportionate tax effects associated with the termination of hedge accounting. The 2018 tax benefit was primarily due to the$40.2 million of deferred tax benefit related to finalizing our provisional estimates connected to the Tax Act,$19.6 million of deferred tax benefit related to the Steves litigation, and$10.2 million of benefit related to our investment in ABS, offset by tax expense of$5.4M million for a net increase to uncertain positions including interest, as well as tax expense associated with strong business results of our foreign subsidiaries such asAustralia ,Canada , andUK . The effective tax rate for both periods includes the impact of the GILTI tax. Comparison of the Year EndedDecember 31, 2018 to the Year EndedDecember 31, 2017 December 31, 2018 December 31, 2017 % of Net % of Net (dollars in thousands) Revenues Revenues Net revenues$ 4,346,847 100.0 %$ 3,763,749 100.0 % Cost of sales 3,428,311 78.9 % 2,916,232 77.5 % Gross margin 918,536 21.1 % 847,517 22.5 %
Selling, general and administrative 734,166 16.9 % 573,004
15.2 % Impairment and restructuring charges 17,328 0.4 % 13,056 0.3 % Operating income 167,042 3.8 % 261,457 6.9 % Interest expense, net 70,818 1.6 % 79,034 2.1 % Other (income) expense (34,887 ) (0.8 )% 40,122 1.1 % Income before taxes, equity earnings 131,111 3.0 % 142,301 3.8 % and discontinued operations Income tax (benefit) expense (10,058 ) (0.2 )% 137,818 3.7 % Income from continuing operations, net of tax 141,169 3.2 % 4,483 0.1 % Equity earnings of non-consolidated entities 738 - % 3,639 0.1 % Net income$ 141,907 3.3 %$ 8,122 0.2 % Consolidated Results Net Revenues-Net revenues increased$583.1 million , or 15.5%, to$4,346.8 million in the year endedDecember 31, 2018 from$3,763.7 million in the year endedDecember 31, 2017 . The increase was due to a 15% contribution from recent acquisitions and a 1% increase in core revenue growth. Core growth included a 2% increase in price, partially offset by a 1% decrease in volume. Gross Margin-Gross margin increased$71.0 million , or 8.4%, to$918.5 million in the year endedDecember 31, 2018 from$847.5 million in the year endedDecember 31, 2017 . Gross margin as a percentage of net revenues was 21.1% in the year endedDecember 31, 2018 and 22.5% in the year endedDecember 31, 2017 . The increase in gross margin was due to favorable pricing and contribution from our recent acquisitions, partially offset by material and freight inflation. The decrease in gross margin as a percentage of sales was due primarily to the dilutive impact of our acquisitions, material and freight inflation, and operational inefficiencies due to lower volumes and favorable mix, partially offset by price. SG&A Expense-SG&A expense increased$161.2 million , or 28.1%, to$734.2 million in the year endedDecember 31, 2018 from$573.0 million in the year endedDecember 31, 2017 . SG&A expense as a percentage of net revenues was 16.9% for the year endedDecember 31, 2018 and 15.2% for the year endedDecember 31, 2017 . The increase in SG&A expense was primarily due to a litigation contingency accrual of$76.5 million , SG&A associated with our acquisitions, and increased professional fees. Excluding the impact of the litigation contingency accrual and SGA associated with our acquisitions, SG&A would have been$589.7 million or 15.3% of net revenues on a comparative basis to 2017. Impairment and Restructuring Charges-Impairment and restructuring charges increased$4.3 million , or 32.7%, to$17.3 million in the year endedDecember 31, 2018 from$13.1 million in the year endedDecember 31, 2017 . The 2018 charges consisted primarily of personnel restructuring costs in ourNorth America ,Europe andAustralasia segments as well as plant consolidations in ourNorth America andAustralasia segments. The 2017 charges consisted primarily of a reduction in workforce in our North American segment as well as ongoing restructuring costs in ourEurope segment. 51
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Interest Expense, Net-Interest expense, net decreased$8.2 million , or 10.4%, to an expense of$70.8 million in the year endedDecember 31, 2018 from an expense of$79.0 million in the year endedDecember 31, 2017 . The decrease was primarily due to additional interest expense incurred in 2017 resulting from the write-offs 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 and higher pre-IPO debt levels. Other (Income) Expense - Other (income) expense increased$75.0 million , to income of$34.9 million in the year endedDecember 31, 2018 from expense of$40.1 million in the year endedDecember 31, 2017 . The Other income in the year endedDecember 31, 2018 was primarily due to a fair value adjustment of$20.8 million associated with our acquisition of the remaining shares outstanding of an equity investment, foreign currency gains of$11.3 million , and legal settlement income of$7.5 million , partially offset by pension expense of$7.0 million . Other expense in the year endedDecember 31, 2017 primarily consisted of a loss on extinguishment of debt of$23.3 million associated with our Term Loan, pension expense of$12.6 million , and foreign currency losses of$11.4 million , partially offset by a beneficial contract settlement of$2.2 million and legal settlement income of$2.5 million . Income Taxes - Income tax benefit in the year endedDecember 31, 2018 was$10.1 million , compared to an expense of$137.8 million in the year endedDecember 31, 2017 . The effective tax rate in the year endedDecember 31, 2018 was a benefit of 7.7% compared to an expense of 96.8% in the year endedDecember 31, 2017 . The 2018 tax benefit of$10.1 million was primarily due to the$40.2 million of deferred tax benefit related to finalizing our provisional estimates connected to the Tax Act,$19.6 million of deferred tax benefit related to the Steves' litigation, and$10.2 million of benefit related to our investment in ABS, offset by tax expense of$5.4 million for a net increase to uncertain tax positions including interest, as well as tax expense associated with strong business results of our foreign subsidiaries such asAustralia ,Canada , andUK . The effective tax rate for the year endedDecember 31, 2018 includes the impact of the new GILTI tax. As discussed above, we have elected to account for the impact of GILTI in the period in which it is incurred. Tax expense for the year endedDecember 31, 2017 included a provisional estimate of the change in theU.S. corporate income tax rate from 35% to 21% and the one-time deemed repatriation tax. As a result of the lowering of theU.S. federal tax rate, we revalued our net deferred tax assets in theU.S. reflecting the lower expected benefit in theU.S. in the future. This estimate of the revaluation resulted in additional non-cash tax expense totaling approximately$21.1 million . The provisional estimate of the one-time deemed repatriation tax, which effectively subjected the Company's net aggregate historic foreign earnings to taxation in theU.S. , resulted in a further tax charge of$11.3 million . While this repatriation tax is measured as ofDecember 31, 2017 , taxpayers are permitted to pay the tax over an 8-year period which resulted in an increase to our non-current liabilities. During the fourth quarter of 2017, the Company undertook certain transactions which premised the repatriation of certain earnings from foreign subsidiaries. While these transactions were not undertaken as a direct result of tax reform, theU.S. tax implications were heavily impacted due to the timing of the transactions and the measurement dates as outlined in the Tax Act. We recorded a provisional estimate of the effects of these transactions resulting in a net increase to tax expense of$65.8 million related to these transactions and their impacts under the Tax Act. Segment Results We report our segment information in the same way management internally organizes the business in assessing performance and making decisions regarding allocation of resources in accordance with ASC 280-10- Segment Reporting. We have determined that we have three reportable segments, organized and managed principally by geographic region. Our reportable segments areNorth America ,Europe andAustralasia . We report all other business activities in Corporate and unallocated costs. We define Adjusted EBITDA as net income (loss), adjusted for the following items: loss from discontinued operations, net of tax; equity earnings of non-consolidated entities; income tax (benefit) expense; depreciation and amortization; interest expense, net; impairment and restructuring charges; gain on previously held shares of equity investment; (gain) loss on sale of property and equipment; share-based compensation expense; non-cash foreign exchange transaction/translation (income) loss; other non-cash items; other items; and costs related to debt restructuring and debt refinancing. For additional information on segment Adjusted EBITDA, see Note 18 - Segment Information to our consolidated financial statements included in this 10-K. 52
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Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 Year Ended (amounts in thousands) December 31, 2019 December 31, 2018 Net revenues from external customers % Variance North America$ 2,534,336 $ 2,461,633 3.0 % Europe 1,178,441 1,215,299 (3.0) % Australasia 576,984 669,915 (13.9) % Total Consolidated$ 4,289,761 $ 4,346,847 (1.3) % Percentage of total consolidated net revenues North America 59.1 % 56.6 % Europe 27.5 % 28.0 % Australasia 13.4 % 15.4 % Total Consolidated 100.0 % 100.0 % Adjusted EBITDA(1) North America $ 267,335 $ 279,526 (4.4) % Europe 116,193 122,810 (5.4) % Australasia 74,484 90,885 (18.0) % Corporate and unallocated costs (42,974 ) (34,003 ) 26.4 % Total Consolidated $ 415,038 $ 459,218 (9.6) % Adjusted EBITDA as a percentage of segment net revenues North America 10.5 % 11.4 % Europe 9.9 % 10.1 % Australasia 12.9 % 13.6 % Total Consolidated 9.7 % 10.6 % (1) Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. For a discussion of our presentation of Adjusted EBITDA, see Note 18 - Segment Information in our consolidated financial statements. North America Net revenues inNorth America increased$72.7 million , or 3.0%, to$2,534.3 million in the year endedDecember 31, 2019 from$2,461.6 million in the year endedDecember 31, 2018 . The increase was primarily due to a 5% increase attributable to the acquisitions of ABS and VPI, partially offset by a 2% decrease in core revenues. Core revenue decline included a 5% decrease in volume/mix, offset by a 3% increase in price. Adjusted EBITDA inNorth America decreased$12.2 million , or 4.4%, to$267.3 million in the year endedDecember 31, 2019 from$279.5 million in the year endedDecember 31, 2018 . The decrease was primarily due to lower core volumes, the non-recurrence of proceeds of a 2018 legal settlement of$7.5 million , and increased costs related to operating inefficiencies, partially offset by favorable pricing and the contributions from our ABS and VPI acquisitions.Europe Net revenues inEurope decreased$36.9 million , or 3.0%, to$1,178.4 million in the year endedDecember 31, 2019 from$1,215.3 million in the year endedDecember 31, 2018 . The decrease was primarily due to an unfavorable foreign exchange impact of 6%, partially offset by a 2% increase attributable to the acquisition of Domoferm and core revenue growth of 1%, which included a 2% increase in price offset by a decrease in volume/mix. Adjusted EBITDA inEurope decreased$6.6 million , or 5.4%, to$116.2 million in the year endedDecember 31, 2019 from$122.8 million in the year endedDecember 31, 2018 . The decrease was primarily due to the impact of unfavorable foreign exchange, unfavorable revenue mix, and higher SG&A costs, partially offset by improved productivity and favorable pricing.Australasia Net revenues inAustralasia decreased$92.9 million , or 13.9%, to$577.0 million in the year endedDecember 31, 2019 from$669.9 million in the year endedDecember 31, 2018 . The decrease was due primarily to a decrease in core revenues of 10% and unfavorable foreign exchange rates of 6%, partially offset by a 2% increase attributable to the acquisition of A&L. 53
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Adjusted EBITDA inAustralasia decreased$16.4 million , or 18.0%, to$74.5 million in the year endedDecember 31, 2019 from$90.9 million in the year endedDecember 31, 2018 . The decrease was primarily due to lower volumes from market headwinds and unfavorable mix, partially offset by improved productivity and reduced SG&A. Comparison of the Year EndedDecember 31, 2018 to the Year EndedDecember 31, 2017 Year Ended (dollars in thousands) December 31, 2018 December 31, 2017 Net revenues from external customers % Variance North America$ 2,461,633 $ 2,157,898 14.1 % Europe 1,215,299 1,042,767 16.5 % Australasia 669,915 563,084 19.0 % Total Consolidated$ 4,346,847 $ 3,763,749 15.5 % Percentage of total consolidated net revenues North America 56.6 % 57.3 % Europe 28.0 % 27.7 % Australasia 15.4 % 15.0 % Total Consolidated 100.0 % 100.0 % Adjusted EBITDA(1) North America $ 279,526 $ 273,192 2.3 % Europe 122,810 131,200 -6.4 % Australasia 90,885 74,386 22.2 % Corporate and Unallocated costs (34,003 ) (43,616 ) -22.0 % Total Consolidated $ 459,218 $ 435,162 5.5 % Adjusted EBITDA as a percentage of segment net revenues North America 11.4 % 12.7 % Europe 10.1 % 12.6 % Australasia 13.6 % 13.2 % Total Consolidated 10.6 % 11.6 % (1) Adjusted EBITDA is a financial measure that is not calculated in
accordance with GAAP. For a discussion of our presentation of Adjusted
EBITDA, see Note 18 - Segment Information in our consolidated financial
statements.North America Net revenues inNorth America increased$303.7 million , or 14.1%, to$2,461.6 million in the year endedDecember 31, 2018 from$2,157.9 million in the year endedDecember 31, 2017 . The increase was primarily due to a 14% increase attributable to the acquisitions of MMI Door and ABS. Adjusted EBITDA inNorth America increased$6.3 million , or 2.3%, to$279.5 million in the year endedDecember 31, 2018 from$273.2 million in the year endedDecember 31, 2017 . The increase was primarily due to the MMI Door and ABS acquisitions partially offset by the impact of a lag in pricing to offset inflation in material and freight and lower core volumes and mix shift to lower margin products.Europe Net revenues inEurope increased$172.5 million , or 16.5%, to$1,215.3 million in the year endedDecember 31, 2018 from$1,042.8 million in the year endedDecember 31, 2017 . The increase was primarily due to a 13% increase attributable to the acquisitions of Mattiovi and Domoferm, core revenue growth of 1%, and a favorable foreign exchange impact of 3%. Adjusted EBITDA inEurope decreased$8.4 million , or 6.4%, to$122.8 million in the year endedDecember 31, 2018 from$131.2 million in the year endedDecember 31, 2017 . The decrease was primarily due to inflation, unfavorable product mix, partially offset by favorable pricing and our acquisitions of Mattiovi and Domoferm. 54
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Net revenues inAustralasia increased$106.8 million , or 19.0%, to$669.9 million in the year endedDecember 31, 2018 from$563.1 million in the year endedDecember 31, 2017 . The increase was due primarily to a 20% increase attributable to the acquisitions of Kolder and A&L, core revenue growth of 2%, consisting of an increase in volume/mix of 1% and favorable pricing of 1%, offset by unfavorable foreign exchange rates of 3%. Adjusted EBITDA inAustralasia increased$16.5 million , or 22.2%, to$90.9 million in the year endedDecember 31, 2018 from$74.4 million in the year endedDecember 31, 2017 . The increase in Adjusted EBITDA was primarily due to the acquisitions of Kolder and A&L and pricing initiatives, partially offset by material inflation. Liquidity and Capital Resources Overview We have historically funded our operations through a combination of cash from operations, draws on our revolving credit facilities, factoring agreements, and the issuance of non-revolving debt such as our Term Loan Facility and Senior Notes. Working capital, which we define as accounts receivable plus inventory less accounts payable, fluctuates throughout the year and is affected by the seasonality of sales of our products, customer payment patterns, and the translation of the balance sheets of our foreign operations into theU.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 ourNorth America andEurope segments, which represent the substantial majority of our revenues, and decreases starting in the fourth quarter as inventory levels and accounts receivable decline. Inventories fluctuate for raw materials with long delivery lead times, such as steel, as we work through prior shipments and take delivery of new orders. As ofDecember 31, 2019 , we had total liquidity (a non-GAAP measure) of$554.5 million , which included$226.0 million in unrestricted cash,$313.1 million available for borrowing under the ABL Facility, and AUD 21.9 million ($15.4 million USD ) available for borrowing under the Australia Senior Secured Credit Facility. This compares to total liquidity of$380.2 million as ofDecember 31, 2018 . The increase was primarily due to higher unrestricted cash balances and increased revolving credit facility availability deriving from the repayment of ABL Facility borrowings with proceeds from an incremental Term Loan facility borrowing transacted inSeptember 2019 , partially offset by the expiration of the Euro Revolving Credit Facility. As ofDecember 31, 2019 , our cash balances, including$3.9 million of restricted cash, consisted of$54.7 million in theU.S. and$175.2 million in non-U.S. subsidiaries. Based on our current level of operations, the seasonality of our business and anticipated growth, we believe that cash provided by operations and other sources of liquidity, including cash, cash equivalents and borrowings under our revolving credit facilities, will provide adequate liquidity for ongoing operations, planned capital expenditures and other investments, and debt service requirements for at least the next twelve months. We may, from time to time, refinance, reprice, extend, retire or otherwise modify our outstanding debt to lower our interest payments, reduce our debt or otherwise improve our financial position. These actions may include repricing amendments, extensions, and/or opportunistic refinancing of debt. The amount of debt that may be refinanced, repriced, extended, retired or otherwise modified, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations. Our affiliates may also purchase our debt from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of the debt, and we would continue to reflect the debt as outstanding in our consolidated balance sheets. Based on hypothetical variable rate debt that would have resulted from drawing each revolving credit facility up to the full commitment amount, a 1.0% decrease in interest rates would have reduced our interest expense by$10.7 million for the year endedDecember 31, 2019 . A 1.0% increase in interest rates would have increased our interest expense by$11.0 million for the same period. The impact of these hypothetical changes would have been partially mitigated by interest rate caps and the floors that apply to certain of our debt agreements. Borrowings and Refinancings InDecember 2017 , we issued$800.0 million of unsecured Senior Notes, repriced and amended the Term Loan Facility, and repaid$787.4 million of outstanding term loan borrowings with the net proceeds from the Senior Notes. TheDecember 2017 refinancing transactions reduced our overall interest rates and modified other terms and provisions, including providing for additional covenant flexibility and additional capacity under the Term Loan Facility. InDecember 2018 , we amended the ABL Facility, providing for a$100.0 million increase in theU.S. revolving credit commitments. InDecember 2019 , we amended our ABL facility to reflect current banking regulatory requirements, which do not have a financial impact. InSeptember 2019 , we amended the Term Loan Facility to provide for an incremental aggregate principal amount of$125.0 million and used the proceeds to repay$115.0 million of outstanding borrowings under the ABL Facility. 55
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InFebruary 2018 , we amended the Australia Senior Secured Credit Facility to include an additional AUD 55.0 million floating rate term loan facility. InJune 2019 , we reallocated AUD 5.0 million from the term loan commitment to the interchangeable commitment of the Australia Senior Secured Credit Facility. As ofDecember 31, 2019 , we were in compliance with the terms of all of our Credit Facilities. Our results have been and will continue to be impacted by substantial changes in our net interest expense throughout the periods presented and in the future. See Note 15 - Long-Term Debt in our consolidated financial statements for additional details. Factoring arrangements Our ABS subsidiary, acquired inMarch 2018 , has entered into factoring agreements with aU.S. -based financial institution under which it can elect to sell certain of its accounts receivable under non-recourse agreements. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk of non-collection to the factor. Thus, cash proceeds from these arrangements are reflected as operating activities, including the change of accounts receivable on our statement of cash flows each period. We do not service any factored accounts after the factoring has occurred and do not have any servicing assets or liabilities. We utilize factoring arrangements as part of our financing to manage working capital. The aggregate gross amount factored under these arrangements was$74.5 million and$56.3 million for the year endedDecember 31, 2019 andDecember 31, 2018 , respectively. The cost of factoring is reflected in the accompanying consolidated statements of operations as interest expense with other financing costs and was$0.5 million and$0.4 million for the year endedDecember 31, 2019 andDecember 31, 2018 , respectively. Cash Flows The following table summarizes the changes to our cash flows for the periods presented: Year Ended December 31, December 31, December 31, (amounts in thousands) 2019 2018 2017 Cash provided by (used in): Operating activities$ 302,709 $ 219,653 $ 265,793 Investing activities (184,948 ) (284,141 ) (189,793 ) Financing activities (6,411 ) (67,475 ) 64,090 Effect of changes in exchange rates on cash and cash equivalents 903
(6,648 ) 12,692
Net change in cash and cash equivalents
Cash Flow from Operations Net cash provided by operating activities increased$83.1 million to$302.7 million in the year endedDecember 31, 2019 from$219.7 million in net cash provided by operating activities in the year endedDecember 31, 2018 . The increase in cash provided by operating activities was due primarily to improvement in working capital as a result of optimization of vendor payment terms, lower inventory balances due to reduced core revenue volumes, and reduced cash taxes. Net cash provided by operating activities decreased$46.1 million to$219.7 million in the year endedDecember 31, 2018 from$265.8 million in the year endedDecember 31, 2017 . The decrease in cash provided by operating activities resulted primarily from increased accounts receivable due to increased sales volume and changes in terms with customers, increases in inventory associated with our recent acquisitions and stock build program and to ensure adequate raw material availability, and a decrease in accounts payable. Cash Flow from Investing Activities Net cash used in investing activities decreased$99.2 million to$184.9 million in the year endedDecember 31, 2019 from$284.1 million in the year endedDecember 31, 2018 . The decrease was primarily due to a decrease in the cash used for acquisitions. Net cash used in investing activities increased$94.3 million to$284.1 million in the year endedDecember 31, 2018 from$189.8 million in the year endedDecember 31, 2017 . The increase was primarily due to cash used for acquisitions and capital expenditures compared to the prior year. 56
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Cash Flow from Financing Activities Net cash used in financing activities was$6.4 million in the year endedDecember 31, 2019 and was comprised primarily of repurchases of our Common Stock of$20.0 million , offset by increased borrowings of$13.1 million . Net cash used in financing activities was$67.5 million in the year endedDecember 31, 2018 and comprised primarily of repurchases of our Common Stock of$125.0 million and payments to tax authorities of$9.5 million , offset by increased borrowings of$70.5 million . Net cash provided by financing activities was$64.1 million in the year endedDecember 31, 2017 and was comprised primarily of proceeds from the IPO of$480.3 million , of which$375.0 million of proceeds were used to partially repay outstanding debt. Holding Company Status We are a holding company that conducts all of our operations through subsidiaries. The majority of our operating income is derived from JWI, our main operating subsidiary. Consequently, we rely on dividends or advances from our subsidiaries. The ability of our subsidiaries to pay dividends to us is subject to applicable local law and may be limited due to the terms of other contractual arrangements, including our Credit Facilities and the Senior Notes. The Australia Senior Secured Credit Facility also contain restrictions on dividends that limit the amount of cash that the obligors under these facilities can distribute to JWI. Obligors under the Australia Senior Secured Credit Facility may pay dividends only to the extent they do not exceed 80% of after tax net profits (with a one-year carryforward of unused amounts) and only while no default is continuing under such agreement. For further information regarding the Australia Senior Secured Credit Facility, see Note 15 - Long-Term Debt in our consolidated financial statements. The amount of our consolidated net assets that were available to be distributed under our credit facilities as ofDecember 31, 2019 was$551.3 million . Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Contractual Obligations The following table summarizes our significant contractual obligations atDecember 31, 2019 : Payments Due By Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years (dollars in thousands) Contractual Obligations(1) Long-term debt obligations$ 1,513,272 $ 64,562 $ 42,864 $ 587,754 $ 818,092 Finance lease obligations 4,504 1,451 1,926 1,127 -
Operating lease obligations 246,581 53,894 79,799
53,644 59,244 Purchase obligations(2) 12,949 8,977 2,964 950 58 Interest on long-term debt obligations(3) 386,086 63,171 123,946 119,582 79,387 Totals:$ 2,163,392 $ 192,055 $ 251,499 $ 763,057 $ 956,781
____________________________
(1) Not included in the table above are our unfunded pension liabilities
totaling
million as ofDecember 31, 2019 , for which the timing of payment is unknown. (2) Purchase obligations are defined as purchase agreements that are
enforceable and legally binding and that specify all significant terms,
including quantity, price, and the approximate timing of the transaction.
The obligations reflected in the table relates primarily to raw materials
purchase agreements, costs associated with enterprise solutions implementations, sales and marketing, and software hosting services. (3) Interest on long-term debt obligations is calculated based on debt
outstanding and interest rates in effect on
account scheduled maturities and amortization payments. 57
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Critical Accounting Policies and Estimates Our MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which may differ from these estimates. Our significant accounting policies are fully disclosed in our annual consolidated financial statements included elsewhere in this Form 10-K. The following discussion highlights the estimates we believe are critical and should be read in conjunction with the consolidated financial statements included in Part II, Item 8 of this Form 10-K. Revenue Recognition Revenue is recognized when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs with the transfer of control of our products or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The taxes we collect concurrent with revenue-producing activities (e.g., sales tax, value added tax, and other taxes) are excluded from revenue. Incentive payments to customers that directly relate to future business are recorded as a reduction of net revenues over the periods benefited. Shipping and handling costs and the related expenses are reported as fulfillment revenues and expenses for all customers. Therefore all shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in cost of sales. The expected costs associated with our base warranties and field service actions continue to be recognized as expense when the products are sold (see Note 14 - Warranty Liabilities). Since payment is due at or shortly after the point of sale, the contract asset is classified as a receivable. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We do not typically include extended payment terms in our contracts with customers. Incidental items that are immaterial in the context of the contract are recognized as expense. Acquisitions We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their acquisition date fair values.Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. If the fair value of the acquired assets exceeds the purchase price the difference is recorded as a bargain purchase in other income (expense). 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 be 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. Allowance for Doubtful Accounts Substantially all accounts receivable arise from sales to customers in our manufacturing and distribution businesses and are recognized net of offered cash discounts. Credit is extended in the normal course of business under standard industry terms that normally reflect 60 day or less payment terms and do not require collateral. An allowance is recorded based on a variety of factors, including the length of time receivables are past due, the financial health of our customers, unusual macroeconomic conditions and historical experience. If the customer's financial conditions were to deteriorate resulting in the inability to make payments, additional allowances may need to be recorded which would result in additional expenses being recorded for the period in which such determination was made. Inventories Inventories are valued at the lower of cost or market or net realizable value and are determined by the FIFO or average cost methods. We record provisions to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory requires us to evaluate historical inventory usage and future production needs. Accelerating the disposal process or incorrect estimates may cause actual results to differ from the estimates at the time such inventory is disposed or sold. 58
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Intangible Assets Definite lived intangible assets are amortized on a straight-line basis over their estimated useful lives that typically range from 1 to 40 years. The lives of definite lived intangible assets are reviewed and reduced if necessary, whenever changes in their planned use occur. Legal and registration costs related to internally developed patents and trademarks are capitalized and amortized over the lesser of their expected useful life or the legal patent life. We review the carrying value of intangible assets to assess their recoverability when facts and circumstances indicate that the carrying value may not be recoverable. Long-Lived Assets Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or a change in utilization of property and equipment. We group assets to test for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the assets. When evaluating long-lived assets and definite lived intangible assets for potential impairment, the first step to review for impairment is to forecast the expected undiscounted cash flows generated from the anticipated use and eventual disposition of the asset. If the expected undiscounted cash flows are less than the carrying value of the asset, then an impairment charge is required to reduce the carrying value of the asset to fair value. If we recognize an impairment loss, the carrying amount of the asset is adjusted to fair value based on the discounted estimated future net cash flows. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset. For an amortizable intangible asset, the new cost basis will be amortized over the remaining useful life of the asset. Our impairment loss calculations require management to apply judgments in estimating future cash flows to determine asset fair values, including forecasting useful lives of the assets and selecting the discount rate that represents the risk inherent in future cash flows.Goodwill 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. Current accounting guidance provides an entity the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including attributable goodwill). If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed. If the fair value of the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. We estimated the fair value of our reporting units using a discounted cash flow model (implied fair value measured on a non-recurring basis using level 3 inputs). Inherent in the development of the discounted cash flow projections are assumptions and estimates of our future revenue and terminal growth rates, profit margins, and cost of capital. Our judgments with respect to these metrics are based on historical experience, current trends, consultations with external specialists, and other information. Changes in assumptions or estimates used in our goodwill impairment testing could materially affect the determination of the fair value of a reporting unit, and therefore, could eliminate the excess of fair value over carrying value of a reporting unit and, in some cases, could result in impairment. Such changes in assumptions could be caused by items such as a loss of one or more significant customers, decline in the demand for our products due to changing economic conditions or failure to control cost increases above what can be recouped in sale price increases. These types of changes would negatively affect our profits, revenues and growth over the long term and such a decline could significantly affect the fair value assessment of our reporting units and cause our goodwill to become impaired. As ofDecember 31, 2019 , the fair value of ourNorth America ,Europe andAustralasia reporting units would have to decline by approximately 42%, 33% and 40%, respectively, to be considered for potential impairment. 59
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Warranty Accrual Warranty terms range primarily from one year to lifetime on certain window and door components. Warranties are normally limited to replacement or service of defective components for the original customer. Some warranties are transferable to subsequent owners and are generally limited to ten years from the date of manufacture or require pro-rata payments from the customer. A provision for estimated warranty costs is recorded at the time of sale based on historical experience and we periodically adjust these provisions to reflect actual experience. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate both the positive and negative evidence that is relevant in assessing whether we will realize the deferred tax assets. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not 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 Act passed inDecember 2017 had significant effects on our financial statements. In accordance with Staff Accounting Bulletin No.118 issued by theSEC inDecember 2017 immediately following the passage of the Tax Act, we made provisional estimates for certain direct and indirect effects of the Tax Act based on information available to us for the year endedDecember 31, 2017 . In the fourth quarter of 2018, we completed our accounting for all the enactment-date income tax effects of the Tax Act and recorded any adjustments as a component of income tax expense from continuing operations. The Tax Act subjects aU.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. We have elected to account for the impact of GILTI in the period in which it is incurred. 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 theU.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. AnyU.S. federal, state and foreign income taxes refundable and payable are reported in other current assets and other current liabilities in the consolidated balance sheets as ofDecember 31, 2019 andDecember 31, 2018 . We recorded a non-currentU.S. receivable of$0.8 million atDecember 31, 2018 related to the one-time deemed repatriation tax liability, which is included in other assets in the accompanying consolidated balance sheet. We do not have any non-current taxes receivable or payable atDecember 31, 2019 . We record interest and penalties on amounts due to tax authorities as a component of income tax expense in the consolidated statements of operations. Derivative Financial Instruments We utilize derivative financial instruments to manage foreign currency exposures related to subsidiaries that operate outside theU.S. and use their local currency as the functional currency. We record all derivative instruments in the consolidated balance sheets at fair value. Changes in a derivative's fair value are recognized in earnings unless specific hedge criteria are met, and we elect hedge accounting prior to entering into the derivative. If a derivative is designated as a fair value hedge, the changes in fair value of both the derivative and the hedged item attributable to the hedged risk are recognized in the results of operations. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in consolidated other comprehensive income (loss) and subsequently classified to the consolidated statements of operations when the hedged item impacts earnings. At the inception of a fair value or cash flow hedge transaction, we formally document the hedge relationship and the risk management objective for undertaking the hedge. In addition, we assess both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value or cash flows of the hedged item and whether the derivative is expected to continue to be highly effective. The impact of any ineffectiveness is recognized in our consolidated statements of operations. 60
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Contingent Liabilities Contingent liabilities require significant judgment in estimating potential losses for legal claims. Each quarter, we review significant new claims and litigation for the probability of an adverse outcome. Estimates are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will materially exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators, and the estimated loss can change materially as individual claims develop. Share-based Compensation Plan We have share-based compensation plans that provide for compensation to employees through various grants of share-based instruments. We apply the fair value method of accounting using the Black-Scholes option pricing model to determine the compensation expense for stock appreciation rights. The compensation expense for RSU awarded is based on the fair value of the RSU at the date of grant. Compensation expense is recorded in the consolidated statements of operations and is recognized over the requisite service period. The determination of obligations and compensation expense requires the use of several mathematical and judgmental factors, including stock price, expected volatility, the anticipated life of the option, estimated risk-free rate, and the number of shares or share options expected to vest. Any difference in the number of shares or share options that actually vest can affect future compensation expense. Other assumptions are not revised after the original estimate. 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 theU.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% 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. Employee Retirement and Pension Benefits The obligations under our defined benefit pension plans are calculated using actuarial models and methods. The most critical assumption and estimate used in the actuarial calculations is the discount rate for determining the current value of benefit obligations. Other assumptions and estimates used in determining benefit obligations and plan expenses include expected return on plan assets, inflation rates, and demographic factors such as retirement age, mortality, and turnover. These assumptions and estimates are evaluated periodically and are updated accordingly to reflect our actual experience and expectations. The discount rate used to determine the benefit obligations was computed through a projected benefit cash flow model. This approach determines the discount rate as the rate that equates the present value of the cash flows (determined using that single rate) to the present value of the cash flows where each cash flows' present value is determined using the spot rates from the Willis Towers Watson RATE: Link 10:90 Yield Curve. The discount rate utilized to calculate the projected benefit obligation at the measurement date for ourU.S. pension plan decreased to 3.31% atDecember 31, 2019 from 4.27% atDecember 31, 2018 . As the discount rate is reduced or increased, the pension and post retirement obligation would increase or decrease, respectively, and future pension and post-retirement expense would increase or decrease, respectively. Lowering the discount rate by 0.25% would increase theU.S. pension and post-retirement obligation atDecember 31, 2019 by approximately$14.6 million and would increase estimated fiscal year 2019 expense by approximately$1.5 million . Increasing the discount rate by 0.25% would decrease theU.S. pension and post-retirement obligation atDecember 31, 2019 by approximately$13.8 million and would decrease estimated fiscal year 2019 expense by approximately$1.3 million . We determine the expected long-term rate of return on plan assets based on the plan assets' historical long-term investment performance, current asset allocation, and estimates of future long-term returns by asset class. Holding all other assumptions constant, a 1% increase or decrease in the assumed rate of return on plan assets would have decreased or increased, respectively, 2019 net periodic pension expense by approximately$3.5 million . The actuarial assumptions we use in determining our pension benefits may differ materially from actual results because of changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions might materially affect our financial position or results of operations. 61
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Capital Expenditures We expect that the majority of our capital expenditures will be focused on supporting our cost reduction and efficiency improvement projects, certain growth initiatives, and to a lesser extent, on sustaining our current manufacturing operations. We are subject to health, safety, and environmental regulations that may require us to make capital expenditures to ensure our facilities are compliant with those various regulations. Item 7A - Quantitative and Qualitative Disclosures About Market Risk We are exposed to various types of market risks, including the effects of adverse fluctuations in foreign currency exchange rates, adverse changes in interest rates, and adverse movements in commodity prices for products we use in our manufacturing. To reduce our exposure to these risks, we maintain risk management controls and policies to monitor these risks and take appropriate actions to attempt to mitigate such forms of market risk. Exchange Rate Risk We have global operations and therefore enter into transactions denominated in various foreign currencies. To mitigate cross-currency transaction risk, we analyze significant forecast exposures where we expect receipts or payments in a currency other than the functional currency of our operations, and from time to time we may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. We also are subject to currency translation risk associated with converting our foreign operations' financial statements intoU.S. dollars. We use short-term foreign currency forward contracts and hedges to mitigate the impact of foreign exchange fluctuations on consolidated earnings. We use foreign currency derivative contracts, with a total notional amount of$91.6 million as ofDecember 31, 2019 , in order to manage the effect of exchange fluctuations on forecasted sales, purchases, acquisitions, inventory and capital expenditures and certain intercompany transactions that are denominated in foreign currencies. We use foreign currency derivative contracts, with a total notional amount of$29.5 million , to hedge the effects of translation gains and losses on intercompany loans and interest. We also use foreign currency derivative contracts, with a total notional amount of$116.5 million , to mitigate the impact to the consolidated earnings of the Company from the effect of the translation of certain subsidiaries' local currency results intoU.S. dollars. We do not use derivative financial instruments for trading or speculative purposes. By using derivative financial instruments to hedge exposures to foreign currency fluctuations, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we are not exposed to the counterparty's credit risk in those circumstances. We attempt to minimize counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is at least upper-medium investment grade. Our derivative instruments do not contain credit risk related contingent features. Interest Rate Risk We are subject to interest rate market risk in connection with our long-term debt, some of which is based upon floating interest rates. To manage our interest rate risk, we may enter into interest rate derivatives, such as interest rate swaps or caps when we deem it to be appropriate. We do not use financial instruments for trading or other speculative purposes and are not a party to any leveraged derivative instruments. Our net exposure to interest rate risk would primarily be based on the difference between outstanding variable rate debt and the notional amount of any interest rate derivatives that are in-the-money. We assess interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain risk management control systems to monitor interest rate risk attributable to both our outstanding and forecasted debt obligations as well as any offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on our future cash flows. TheU.K's Financial Conduct Authority has announced the intent to phase out the use of LIBOR by the end of 2021. Prior to LIBOR being discontinued, we will need to renegotiate the terms of certain of our credit agreements which reference LIBOR as a benchmark in determining the interest rate. As a result, we may incur incremental interest expense depending on the new standard determined. The potential effect of any such event on our cost of capital cannot yet be determined and we are still assessing the impact on our consolidated financial condition, results of operations, and cash flows. Raw Materials Risk Our major raw materials include glass, vinyl extrusions, aluminum, steel, wood, hardware, adhesives, and packaging. Prices of these commodities can fluctuate significantly in response to, among other things, variable worldwide supply and demand across different industries, speculation in commodities futures, general economic or environmental conditions, labor costs, competition, 62
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import duties, tariffs, worldwide currency fluctuations, freight, regulatory costs, and product and process evolutions that impact demand for the same materials. Increasing raw material prices directly impact our cost of sales and our ability to maintain margins depends on implementing price increases in response to increasing raw material costs. The market for our products may or may not accept price increases, and as such, there is no assurance that we can maintain margins in an environment of rising commodity prices. See Item 1A- Risk Factors - Prices and availability 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 have not historically used derivatives or similar instruments to hedge commodity price fluctuations. We purchase from multiple geographically diverse companies to mitigate the adverse impact of higher prices for our raw materials. We also maintain other strategies to mitigate the impact of higher raw material, energy, and commodity costs, which typically offset only a portion of the adverse impact. Item 8 - Financial Statements See Index to Consolidated Financial Statement beginning on page F-1 of the Form 10-K. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A - Controls and Procedures Disclosure Controls and Procedures The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, including this Report, are recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer ("CEO") and principal financial officer ("CFO"), as appropriate to allow timely decisions regarding required disclosure. The Company's management, including the Company's CEO and CFO, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Report and, based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were not effective as ofDecember 31, 2019 because of the material weaknesses in our internal control over financial reporting described below. Management's Report on Internal Control over Financial ReportingThe Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's internal control over financial reporting. The Company's management used the framework in Internal Control-Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations (COSO) to perform this evaluation. Based on this evaluation, management has concluded that we did not maintain effective internal control over financial reporting as ofDecember 31, 2019 , due to the material weaknesses identified below. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. As previously reported in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , management determined that we did not maintain a sufficient complement of personnel in ourEurope operations with the appropriate level of knowledge, experience and training in internal control over financial reporting commensurate with our financial reporting requirements to allow for the consistent execution of control activities. Further, monitoring controls maintained at theEurope operations and corporate levels did not operate with a sufficient degree of precision to provide for the appropriate level of oversight of activities related to our internal control over financial reporting. These material weaknesses contributed to the following additional material weaknesses in that we did not design and maintain effective controls within certain of ourEurope operations related to the review and approval of customer pricing, the review and approval of manual journal entries, and the reconciliation of subsidiary ledger financial information used in the consolidated financial statements. Specifically, we did not design and maintain controls to ensure (i) the review and approval of the initial set-up, and subsequent changes/modifications, of customer pricing related 63
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to revenue arrangements; (ii) that journal entries were properly prepared with sufficient supporting documentation, were reviewed and approved to ensure accuracy and completeness of the journal entries, and were reviewed by an appropriate individual separate from the preparer of such journal entry; and (iii) the subsidiary financial information used in the preparation of the consolidated financial statements agreed to the financial information recorded in the subsidiary ledger, and to the extent there were differences, that they were appropriately validated. These material weaknesses resulted in the revision of the Company's consolidated financial statements for the years endedDecember 31, 2016 , 2017 and 2018 and each of the interim periods of 2018 and the first quarter of 2019. Additionally, these material weaknesses could result in a misstatement of substantially all account balances or disclosures within the European operations that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Management has excluded from its assessment of the Company's internal control over financial reporting as ofDecember 31, 2019 certain elements of the internal control over financial reporting ofVPI Quality Windows, Inc. , which is a wholly-owned subsidiary of the Company that was acquired by the Company in 2019. Subsequent to the acquisition of each entity, certain elements of the acquired business's internal control over financial reporting and related functions, processes and systems were integrated into the Company's existing internal control over financial reporting and related functions, processes and systems. Those elements of the acquired business's internal control over financial reporting that were not integrated have been excluded from management's assessment of the effectiveness of internal control over financial reporting as ofDecember 31, 2019 . The excluded elements represent approximately 0.6% of consolidated total assets and 1.1% of consolidated net revenues as of and for the year endedDecember 31, 2019 . The effectiveness of our internal control over financial reporting as ofDecember 31, 2019 has been audited byPricewaterhouseCoopers LLP , an independent registered public accounting firm, as stated in their report appearing under "Item 8. Financial Statements and Supplementary Data". Remediation Plan for Previously Identified Material Weaknesses as ofDecember 31, 2019 In order to address the material weaknesses described in the Company's 2018 Annual Report on Form 10-K, the Company's management implemented a remediation plan to address the control deficiencies that led to the material weaknesses identified above. The remediation plan includes the following: • Enhance and supplement the finance team inEurope by increasing the number
of roles, reassigning responsibilities, and adding additional resources
with an appropriate level of knowledge and experience in internal control
over financial reporting commensurate with the financial reporting complexities of the organization;
• Enhance the tone, communication and overall awareness of the importance of
internal control over financial reporting from executive management; • Evaluate corporate and segment monitoring controls to ensure they are
designed and operating at the appropriate level of precision required to
support risk mitigation;
• Implement enhancements to the design of our customer pricing controls in
• Implement enhancements to the design of our journal entry controls inEurope ; • Implement enhancements to the design of our controls related to the reconciliation of subsidiary ledger financial information used in the consolidated financial statements;
• Strengthen procedures and set guidelines for documentation of controls
throughout our domestic and international locations for consistency of application; • Institute additional training programs that occur on a regular basis
related to internal control over financial reporting for our world-wide
finance and accounting personnel. 64
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During the period ended
internal control over financial reporting; however, due to contractual
notice periods within
individuals retained were not available until the fourth quarter of 2019;
• conducted quarterly in-person training sessions on internal controls over
financial reporting, monitoring controls, complex accounting topics, account reconciliations and journal entry controls inEurope ; • implemented enhancements to closing processes that included the
centralization of certain tasks, development of manuals and standardized
templates to enhance the evidence supporting the local teams' execution of
internal control over financial reporting; and
• developed a global accounting manual to provide guidance on critical
accounting policies and procedural outlines for their implementation.
Based on the actions taken to date, while management believes that it now has the requisite personnel to consistently operate the controls as designed, additional controls may need to be designed and implemented as part of the remediation plan, especially with respect to pricing. Additionally, for controls that were newly designed and implemented in 2019, management determined that a sustained period of operating effectiveness is required to conclude that the controls are operating effectively. Accordingly, the material weaknesses described have not been remediated as ofDecember 31, 2019 . Changes in Internal Control over Financial Reporting Except for the remediation efforts described above under the caption "Remediation Plan for Previously Identified Material Weaknesses," there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's most recently completed quarter endedDecember 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 65
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