JELD-WEN Holding, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; unaudited. JELD-WEN manufactures and distributes windows, doors, and related products across North America, Europe, and Australasia. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $992.3m | $1,119.0m | $1,971.5m | $2,129.2m |
| Gross profit / margin | $218.7m / 22.0% | $240.2m / 21.5% | $413.0m / 21.0% | $448.3m / 21.1% |
| Operating income / margin | $50.1m / 5.0% | $57.9m / 5.2% | $65.3m / 3.3% | $98.2m / 4.6% |
| Net income | $23.1m | $22.4m | $22.9m | $38.1m |
| Diluted EPS | $0.23 | $0.22 | $0.23 | $0.38 |
| Adjusted EBITDA (non-GAAP) | $125.7m | $127.6m | $200.2m | $216.9m |
Cash flow, six months: Operating cash flow was $38.3m, versus $42.6m. Investing cash outflow was $38.0m, including $35.0m of property and equipment purchases. Financing provided $228.4m, principally from increased borrowings. Cash and cash equivalents were $457.7m at June 27, compared with $226.0m at year-end 2019.
Debt and liquidity: Total debt carrying amount was $1.78bn ($69.2m current), versus $1.53bn at December 31, 2019. The company reported $808.6m of total liquidity, including $457.7m unrestricted cash and $350.9m of revolving-credit availability. It was in compliance with its credit agreements and note indentures at quarter-end.
Material changes and operating trends
- Q2 revenue fell 11.3% year over year, reflecting a 10% decline in core revenue and a 1% adverse foreign-exchange effect. Core volume/mix declined 13%, partly offset by 3% net pricing benefit. For the first half, revenue declined 7.4%.
- Q2 gross margin improved to 22.0% from 21.5%, as pricing, productivity, and COVID-related cost actions offset weaker volume/mix. Operating income nevertheless fell 13.5%; SG&A as a share of revenue rose to 16.8% from 15.8%, partly due to higher litigation costs.
- North America Q2 revenue declined 9.0%, while Adjusted EBITDA rose 4.1%. Europe revenue declined 12.9% and Adjusted EBITDA 2.2%. Australasia revenue declined 18.3% and Adjusted EBITDA 28.3%.
- Six-month Adjusted EBITDA declined 7.7%; Australasia was the weakest segment, with a 36.3% decrease. North America EBITDA was nearly unchanged and Europe declined 8.7%.
Outlook, risks, and unusual items
- COVID-19: Intermittent facility closures occurred, mainly in April and May, with operations fully resumed by quarter-end. Management reported high-teens revenue declines versus prior year in April and May, followed by improvement to prior-year levels in the latter half of Q2. The company reduced discretionary spending, salaries, and some capital expenditures, and monitored customer credit. Management said current liquidity sources were expected to support operations, planned capital expenditures, investments, and debt service for at least 12 months, while emphasizing that the pandemic’s effects remain uncertain. No specific earnings or revenue guidance is provided in the filing.
- Financing: In May, the company issued $250m of 6.25% senior secured notes due 2025, using part of the proceeds to repay its ABL borrowings. It also added AUD 30m of Australian revolving capacity. The ABL had no borrowings at quarter-end.
- Unusual items: Q2 other income included $5.9m of governmental pandemic assistance and a $2.2m reduction in pension expense, partly offset by $6.3m of foreign-currency losses. Adjusted EBITDA included $23.0m of Q2 legal and professional costs as an adjustment; this non-GAAP measure should be considered alongside GAAP results.
- Litigation: The Steves & Sons original antitrust action remained on appeal. The judgment includes $36.5m of past antitrust damages and a divestiture order; conditional damages include $139.4m if divestiture is overturned and $9.9m if both antitrust and divestiture claims are overturned. The appeal was heard in May 2020. Related pricing and allocation matters were settled in June, but the settlement did not resolve the original action. The company says a final adverse outcome could materially affect results, financial position, or cash flows; the cost of a possible divestiture cannot be estimated. Other pending matters include U.S. and Canadian molded-door antitrust class actions and a securities class action.
- Controls and contingencies: Management concluded disclosure controls were not effective because of previously identified material weaknesses in internal control. One weakness, concerning subsidiary-ledger reconciliations, was remediated; other weaknesses remained. The company reported an $81.0m current legal-claims provision, but the filing does not identify that balance as attributable to any single proceeding. It could not estimate potential remedial costs at its Everett, Washington site.
Important facts for investors to verify
- Progress and outcomes in the Steves appeal, including any ruling on divestiture, damages, or attorneys’ fees, and developments in other litigation.
- Whether demand recovery after Q2 persisted, and the extent of any renewed closures, supply-chain disruption, customer credit losses, or raw-material cost increases.
- Debt levels, interest expense, covenant compliance, and the availability of reported revolving-credit capacity as working-capital needs change.
- Progress in remediating remaining internal-control weaknesses and whether the company can conclude its controls are effective.
- Whether the $5.9m pandemic assistance and other temporary cost actions materially influenced Q2 results, and how underlying profitability performs without them.