JELD-WEN Holding, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019, compared with the three months ended March 31, 2018. JELD-WEN manufactures and distributes windows, doors and related products across North America, Europe and Australasia. Results are seasonal, with sales generally stronger in the second and third quarters.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenue | $1,010.9 million | $946.2 million |
| Gross profit / margin | $208.4 million / 20.6% | $205.9 million / 21.8% |
| Operating income / margin | $41.4 million / 4.1% | $38.2 million / 4.0% |
| Net income | $16.6 million | $40.3 million |
| Diluted EPS | $0.16 | $0.37 |
| Adjusted EBITDA (non-GAAP) | $90.6 million; 9.0% of revenue | $87.8 million; 9.3% of revenue |
| Cash used in operating activities | $28.0 million | $65.3 million |
| Cash used in investing activities | $88.9 million | $191.8 million |
- Revenue rose 6.8%, reflecting a 12% contribution from acquisitions, partly offset by 4% unfavorable foreign exchange and 1% lower core revenue. Core pricing increased 2%, while volume/mix declined 3%.
- Gross margin percentage fell 1.2 percentage points. Management cited acquisition dilution, material and freight inflation, lower volumes, unfavorable mix and operational inefficiencies; pricing and productivity partly offset these pressures.
- Net income declined substantially, in part because Q1 2018 included a $20.8 million gain on previously held shares of an acquired equity investment and a $4.0 million tax benefit. Q1 2019 recorded $10.3 million of tax expense, with a 38.4% effective tax rate.
- Consolidated Adjusted EBITDA increased 3.2%, but its margin decreased from 9.3% to 9.0%. North America Adjusted EBITDA grew 13.8%; Europe declined 16.7%, primarily due to foreign exchange and inflation; Australasia declined 1.9%.
- Operating cash use improved year over year, principally due to higher income adjusted for noncash items and working-capital changes. Seasonal increases in receivables and inventory contributed to cash use.
Balance sheet, debt and liquidity
- At March 30, 2019, cash and cash equivalents were $94.0 million; total debt, including current maturities, was approximately $1.57 billion; and shareholders’ equity was $763.9 million.
- Total liquidity, a company-defined non-GAAP measure, was $182.6 million, comprising $94.0 million of unrestricted cash, $80.1 million available under the ABL Facility and $8.5 million available under the Australian facility. This compared with $380.2 million at December 31, 2018. The decrease reflected the VPI acquisition, capital expenditures, share repurchases and expiry of the Euro revolving facility.
- ABL borrowings were $199.2 million; the company reported $88.6 million of combined borrowing availability under revolving facilities. Management said available cash, operating cash flow and revolving credit capacity should provide adequate liquidity for at least the next 12 months. The company was in compliance with its credit facilities at quarter-end.
- Adoption of lease accounting in Q1 added approximately $195 million of operating lease liabilities and corresponding right-of-use assets to the balance sheet, plus a $0.8 million credit to retained earnings. This accounting change materially increased reported assets and liabilities.
Business developments, risks and outlook
- In March 2019, the company acquired VPI Quality Windows for $57.5 million net of cash acquired. VPI serves multifamily, industrial, hospitality and commercial projects and was added to North America. The preliminary allocation included $26.6 million of goodwill.
- The company repurchased 939,798 shares at an average price of $15.96 during the quarter, using $15.0 million; $110.0 million remained under the authorization at March 30, 2019.
- Steves & Sons litigation: A March 2019 amended judgment awarded $36.5 million in past antitrust damages and ordered divestiture of CMI, subject to appeal. Conditional awards included $139.4 million in future antitrust damages if divestiture is overturned and $9.9 million in contract damages if specified claims are overturned. Plaintiffs also sought $28.4 million in attorneys’ fees and $1.7 million in costs. JELD-WEN appealed and recorded a $76.5 million loss-contingency charge. The company said divestiture costs and effects cannot be estimated.
- A separate class-action antitrust case concerning interior molded-door prices seeks unquantified damages. The company said it could not determine whether a loss was probable or estimate its magnitude; an adverse outcome could materially affect results, financial position or cash flows.
- Management provided no quantified earnings or revenue guidance in the supplied filing text. It cited end-market activity, competition, raw-material and freight costs, foreign exchange, interest rates, seasonality, acquisition execution, manufacturing changes and ERP implementation among risks to results.
- Disclosure controls and procedures were deemed ineffective at March 30, 2019 because of previously identified material weaknesses in internal control over financial reporting. Remediation was underway, and management expected to complete its plan by year-end 2019; weaknesses would not be considered remediated until controls had operated and been tested effectively.
Most important facts for investors to verify
- Developments in the Steves appeal, the divestiture order, fee petition and potential cash or operating consequences.
- Progress in remediating internal-control material weaknesses and any subsequent assessment of control effectiveness.
- Whether gross-margin pressure, lower core volume/mix and European profitability weakness persist through the seasonal peak periods.
- Liquidity, borrowing availability, debt and interest costs, including the effect of working-capital needs and acquisition spending.
- Performance and integration of VPI and other acquired businesses, and the contribution of acquisitions to reported growth.