JELD-WEN Holding, Inc. — Q2 2017 Form 10-Q
Reporting period: Fiscal quarter ended July 1, 2017; comparisons are with the quarter ended June 25, 2016. Six-month figures compare the periods ended July 1, 2017 and June 25, 2016. The company manufactures and distributes doors, windows and related products across North America, Europe and Australasia.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $948.7 million | $964.6 million | $1,796.5 million | $1,761.2 million |
| Gross profit / margin | $235.7 million / 24.8% | $212.2 million / 22.0% | $421.7 million / 23.5% | $370.3 million / 21.0% |
| Operating income / margin | $83.7 million / 8.8% | $69.0 million / 7.2% | $121.4 million / 6.8% | $92.1 million / 5.2% |
| Net income | $46.8 million | $66.9 million | $53.2 million | $72.9 million |
| Diluted EPS | $0.43 | $0.81 | $0.46 | $(0.29) |
| Adjusted EBITDA (non-GAAP) | $125.3 million | $112.7 million | $206.3 million | $173.9 million |
Q2 revenue fell 1.6%, reflecting lower core sales and unfavorable foreign exchange, partly offset by acquisitions. Gross margin improved 2.8 percentage points, which management attributed to pricing, cost savings and acquisitions. Q2 Adjusted EBITDA margin rose to 13.2% from 11.7%. For the first half, revenue rose 2.0% and Adjusted EBITDA rose 18.6%.
Q2 net income was lower year over year despite higher operating income, primarily as the prior-year period included a $15.7 million income-tax benefit while 2017 recorded $17.7 million of tax expense. The six-month comparison also reflects the prior-year tax benefit. Interest expense for the first half rose to $44.4 million from $35.2 million, including approximately $7.0 million of debt-cost and original-issue-discount write-offs related to the post-IPO debt repayment.
Segments and material changes
- North America: Q2 revenue decreased 2.8%; Adjusted EBITDA rose 5.3% to $79.8 million. Lower volume/mix, including retail-channel activity and a Florida business-line rationalization, was partly offset by pricing and cost savings.
- Europe: Q2 revenue decreased 3.0%, largely from unfavorable currency effects; Adjusted EBITDA increased 8.1% to $37.1 million, supported by cost actions and portfolio realignment.
- Australasia: Q2 revenue increased 6.0% and Adjusted EBITDA rose 21.7% to $17.3 million, with acquisition contributions and pricing supporting results.
- In June, the company acquired Finnish interior-door maker Mattiovi for approximately $21.2 million in cash. First-half Australasia revenue also benefited from the earlier Trend and Breezway acquisitions.
- The company completed its IPO in February, receiving $472.4 million in net proceeds, and used $375 million to repay term debt. Onex Partners sold shares in a May secondary offering; it retained approximately 45% ownership as of July 1. The secondary sale did not provide proceeds to the company.
Cash, debt and liquidity
- Six-month operating cash flow was $66.2 million, versus $12.6 million in the prior-year period. Investing cash outflow was $38.8 million, including $18.2 million of property and equipment purchases and $21.2 million for businesses, net of cash acquired.
- Cash and cash equivalents were $227.7 million at July 1, 2017, compared with $102.7 million at December 31, 2016.
- Reported long-term debt was $1,231.2 million, with $14.6 million of current maturities and notes payable. The amended term loans bear interest at LIBOR, subject to a 1.00% floor, plus a 2.75%–3.00% margin, and mature July 1, 2022. Quarterly principal amortization is approximately $3.1 million.
- Management reported total liquidity of $527.9 million, including cash and available revolving-facility capacity; combined borrowing availability under revolving facilities was $300.3 million. The company was in compliance with credit-facility terms.
Outlook, risks and unusual items
Management did not provide quantified earnings or revenue guidance. It believes operating cash flow, cash and revolving facilities will be sufficient for operations, planned investment and debt service for at least the next 12 months. Results are seasonal, typically stronger in the second and third calendar quarters, and depend on housing starts and repair-and-remodel activity.
- Risks identified include changes in housing and remodeling demand, competition, customer concentration, raw-material costs and supply interruptions, foreign-exchange and interest-rate movements, labor costs, weather, operational disruptions, acquisitions, product liability and warranty claims, environmental obligations, cybersecurity, and the company’s debt burden.
- Q2 included $0.6 million of impairment and restructuring charges. First-half other items included $15.8 million of legal costs, partly offset by a $2.2 million contract-escrow settlement gain; Adjusted EBITDA is a non-GAAP measure and excludes specified items.
- The company disclosed material weaknesses in income-tax-related internal controls and said disclosure controls were not effective as of July 1. Remediation was underway, with management expecting remediation by year-end 2017, subject to successful operation and testing of controls.
- The Steves and Sons lawsuit alleges antitrust and contract-related violations and seeks injunctive relief and damages, including treble damages. The company disputes the claims and intends to defend them. Other disclosed exposures include self-insured liabilities, warranty obligations and environmental matters; potential Everett remediation costs could be material if extensive action is required and insurance does not cover them.
- Prior-period financial statements were revised for tax-accounting and other accumulated errors that management concluded were not material to the previously issued periods. The revised 2016 comparison is used in this filing.
Investor verification points
- Track whether margin gains and Adjusted EBITDA growth persist as core revenue trends, particularly North American volume, evolve.
- Review cash conversion and working-capital needs; first-half cash flow benefited from improved profitability and working-capital changes.
- Confirm debt reduction, refinancing costs, interest-rate exposure and ongoing covenant compliance.
- Monitor progress in remediating the tax-control material weaknesses and any subsequent disclosures about financial reporting controls.
- Assess the outcome and potential financial impact of the Steves litigation, warranty claims and environmental contingencies.
- Evaluate acquisition performance and distinguish organic growth from acquisition and foreign-exchange effects.