Business context and reporting period
JELD-WEN Holding, Inc. filed this unaudited Form 10-Q for the quarter ended March 28, 2020, comparing results with the quarter ended March 30, 2019. The company 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.
Key financial metrics
Amounts below are in millions of U.S. dollars unless stated otherwise.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $979.2 | $1,010.3 |
| Gross margin / percentage | $194.4 / 19.9% | $208.1 / 20.6% |
| Operating income / margin | $15.2 / 1.6% | $40.3 / 4.0% |
| Net income (loss) | $(0.2) | $15.8 |
| Adjusted EBITDA / margin | $74.5 / 7.6% | $89.3 / 8.8% |
| Net cash used in operating activities | $(76.6) | $(28.0) |
| Capital expenditures | $22.6 | $19.8 |
Adjusted EBITDA is a company-defined non-GAAP measure. At March 28, 2020, cash and cash equivalents were $214.3 million; total liquidity, as defined by the company, was $431.2 million, including $204.0 million of ABL availability and $12.9 million available under the Australia facility. Total debt carrying value was approximately $1.612 billion, including $64.7 million of current maturities. The company reported compliance with credit-facility terms at quarter-end.
Changes versus the prior comparable period
- Revenue declined 3.1%. Core revenue fell 3%, reflecting a 5% decline in volume/mix partly offset by 2% pricing; foreign exchange reduced revenue by 2%, while the VPI acquisition contributed 2%.
- Gross margin fell 0.7 percentage points. Management cited manufacturing inefficiencies in North America and unfavorable volume/mix across regions, partly offset by pricing.
- SG&A rose 5.2% to $172.6 million, primarily due to higher litigation-related legal expense and labor and benefit costs. Impairment and restructuring charges increased to $6.5 million from $3.7 million.
- Adjusted EBITDA declined 16.5%. Segment EBITDA declined in North America, Europe and Australasia; Australasia was down 46.7%, alongside a 23.6% revenue decline.
- Operating cash use worsened by $48.6 million, attributed primarily to lower earnings, seasonal working-capital needs, foreign exchange and the absence of prior-year vendor-payment timing benefits.
Outlook, management commentary and risks
- Management said first-quarter COVID-19 effects on results were limited, but expected a more significant impact in the second quarter. The duration and ultimate effects were described as highly uncertain; the filing provides no quantified earnings or revenue guidance.
- To preserve liquidity, the company drew $100.0 million under its ABL facility in March, restricted discretionary spending and capital expenditures, deferred eligible tax payments, and implemented salary reductions and short-term furloughs. Approximately 10% of 2019 revenue was represented by locations where production was temporarily suspended, according to the filing.
- On May 4, 2020, the company issued $250.0 million of senior secured notes at 6.25%, due 2025. The proceeds repaid the ABL borrowing, with the remainder for general corporate purposes. It also amended its Australia facility to add AUD 30.0 million of revolving capacity and relax certain covenants.
- Major contingencies include the Steves & Sons litigation: the existing judgment includes $36.5 million in past antitrust damages, a divestiture order subject to appeal, conditional additional damages, and a separate $7.1 million award for pricing differences. Further relief and attorneys’ fees remain at issue. A preliminary injunction dispute was settled in April 2020, with a trial on other claims expected in July 2020. The company says it disputes the claims; adverse outcomes could materially affect results, financial position or cash flows.
- Interior molded-door antitrust class actions seek unquantified damages; the company has recorded provisions based on management’s estimates. A securities class action was also filed in February 2020. Environmental remediation at the former Everett, Washington site cannot yet be reasonably estimated and has not been accrued.
- Disclosure controls were not effective at quarter-end because previously identified material weaknesses in internal control over financial reporting had not been remediated. Management continued remediation work.
- The filing revises prior-period financial statements for identified errors and other accumulated misstatements, which management states were not material to previously issued periods. The company also adopted the expected-credit-loss standard, recording a $5.7 million after-tax reduction to retained earnings.
Important facts for investors to verify
- Subsequent quarterly filings: COVID-19 effects on demand, facility utilization, working capital, customer collections and liquidity, including the adequacy of mitigation actions.
- Developments and potential exposure in the Steves & Sons matters, including appeal outcomes, further damages or fees, and any divestiture implications; also monitor the other antitrust and securities cases.
- Debt and liquidity after the $250.0 million notes issuance, including the new interest burden, facility availability, covenant headroom and use of remaining proceeds.
- Progress in remediating material weaknesses and whether disclosure controls and internal controls are subsequently judged effective.
- Underlying operating performance by region, particularly Australasia, manufacturing efficiency, volume/mix and the reconciliation of non-GAAP Adjusted EBITDA to GAAP results.