JELD-WEN Holding, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020; unaudited. JELD-WEN manufactures and distributes windows, doors, and related products across North America, Europe, and Australasia. Results are seasonal and exposed to construction and repair-and-remodel demand.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $1,112.9M | $1,092.0M | $3,084.4M | $3,221.2M |
| Gross margin | $244.9M; 22.0% | $223.8M; 20.5% | $657.9M; 21.3% | $672.1M; 20.9% |
| Operating income | $61.6M; 5.5% | $54.4M; 5.0% | $126.9M; 4.1% | $152.6M; 4.7% |
| Net income | $25.5M | $17.0M | $48.3M | $55.2M |
| Diluted EPS | $0.25 | $0.17 | $0.48 | $0.54 |
| Adjusted EBITDA (non-GAAP) | $130.8M; 11.7% of revenue | $108.9M; 10.0% | $331.0M; 10.7% | $325.8M; 10.1% |
Cash flow, nine months: Operating cash flow was $210.6M versus $164.9M; investing cash outflow was $57.1M versus $153.9M; financing cash inflow was $217.1M versus $6.1M. Cash and restricted cash ended at $606.6M, compared with $131.7M a year earlier. Operating cash flow benefited in part from deferred payroll taxes and working-capital changes.
Debt and liquidity: Debt carrying value was $1.781B, including $68.5M current maturities, versus $1.528B at December 31, 2019. Cash and cash equivalents were $605.8M. Reported total liquidity was $952.8M: $605.8M unrestricted cash plus $347.0M of revolving borrowing availability. The company reported compliance with its debt covenants. In May it issued $250M of 6.25% senior secured notes due 2025, using part of the proceeds to repay ABL borrowings.
Material changes and operating trends
- Q3 revenue rose 1.9%; management attributed the increase to a 2% favorable foreign-exchange impact, while core revenue was stable. Nine-month revenue fell 4.2%, reflecting a 7% decline in volume/mix, partly offset by 3% pricing, foreign exchange, and VPI acquisition contribution.
- Q3 gross margin improved mainly on pricing and lower material costs, partly offset by unfavorable volume/mix in North America and Australasia and labor-cost inflation. SG&A rose 12.7%, primarily from legal costs and variable compensation.
- Nine-month operating income declined 16.8% and net income declined 12.4%, despite improved gross margin percentage. Higher SG&A, including litigation expense, was a key pressure.
- Q3 segment revenue and Adjusted EBITDA were mixed: North America revenue was $662.7M and EBITDA $92.4M; Europe revenue was $311.0M and EBITDA $40.0M; Australasia revenue was $139.2M and EBITDA $18.5M. North America and Europe EBITDA increased year over year; Australasia declined.
- Nine-month Australasia revenue declined 15.5% and Adjusted EBITDA declined 26.8%, the weakest regional trend. North America and Europe EBITDA increased, but corporate and unallocated costs also rose.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing gives no specific numerical earnings or revenue guidance. Management said cash from operations and available liquidity were expected to support operations, planned capital expenditures, investments, and debt service for at least the next 12 months, while emphasizing uncertainty from COVID-19.
- COVID-19: Demand and revenue had fallen by high-teens percentages year over year in April and May, then improved through late Q2 and Q3. Intermittent mandated facility closures, supply-chain disruption, customer credit risk, and possible further demand weakness remained risks. The company received about $7.4M in governmental pandemic assistance during the first nine months.
- Litigation: The Steves antitrust judgment remained under appeal; an adverse outcome could materially affect results, financial position, or cash flows, and potential divestiture costs could not be estimated. Separate interior molded-door class-action settlements called for $28M per defendant in the direct purchaser action and $9.75M per defendant in the indirect purchaser action; both remained subject to final court approval. New Canadian class actions were being contested.
- Legal and other adjustments: Q3 Adjusted EBITDA included $30.2M of “other items,” principally $27.8M in legal and professional expenses. Nine-month “other items” were $70.8M, including $62.5M in legal and professional expenses. These non-GAAP adjustments are significant relative to reported earnings and should be evaluated carefully.
- Controls: Management concluded disclosure controls were not effective at September 26, 2020 because material weaknesses in internal control over financial reporting remained. One weakness involving reconciliation of subsidiary ledger information was considered remediated in June; other identified weaknesses had not been remediated.
- Other exposures: The filing discusses raw-material price and availability volatility, warranty and self-insurance estimates, environmental remediation matters, and $99.1M of outstanding performance bonds and standby letters of credit. The company had not accrued for potential Everett, Washington remediation because costs could not be reasonably estimated.
Important facts for investors to verify
- Whether revenue and volume/mix trends, particularly in Australasia, continued to improve after Q3 and how much reported growth depended on foreign exchange and pricing.
- The composition and recurrence of the substantial legal expenses excluded from Adjusted EBITDA, and the comparability of that non-GAAP measure to GAAP earnings and cash generation.
- Developments in the Steves appeal, the door antitrust settlements and Canadian claims, including any settlement payments, approval, or potential financial impact.
- Progress and sustained effectiveness of internal-control remediation, including the remaining material weaknesses.
- Debt-service capacity and liquidity under changing seasonal working-capital needs, COVID-related conditions, and potential customer or supplier disruption.