Business context and reporting period
JELD-WEN Holding, Inc. is a global manufacturer and distributor of doors and windows, with North America, Europe and Australasia reportable segments. This unaudited Form 10-Q covers the quarter and six months ended June 29, 2019, compared with periods ended June 30, 2018. Results are seasonal, with construction and remodeling activity typically stronger in the second and third quarters.
Unless noted otherwise, amounts below are in U.S. dollars and millions. The company revised prior-period financial statements for errors relating to European installation-contract fulfillment costs; management said the errors and accumulated misstatements were not material to previously issued periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $1,119.0 | $1,172.5 | $2,129.2 | $2,118.6 |
| Gross margin | $240.2 | $248.1 | $448.3 | $452.7 |
| Gross margin % | 21.5% | 21.2% | 21.1% | 21.4% |
| Operating income | $57.9 | $70.3 | $98.2 | $107.0 |
| Net income | $22.4 | $34.7 | $38.1 | $75.1 |
| Diluted EPS | $0.22 | $0.32 | $0.38 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $127.6 | $134.1 | $216.9 | $220.5 |
Material changes versus prior comparable periods
- Q2 revenue fell 4.6%; core revenue declined 3%, reflecting a 5% unfavorable volume/mix effect partly offset by 2% net pricing. Foreign exchange reduced revenue by 3%, while acquisitions added 1%.
- Q2 gross margin dollars decreased 3.2%, but gross margin percentage improved to 21.5% from 21.2%, as pricing and productivity gains more than offset lower volume and unfavorable mix. Operating income and net income declined; net income also faced less favorable other expense and higher restructuring costs.
- First-half revenue edged up 0.5%, as acquisitions contributed 6%, offset by 3% adverse foreign exchange and a 2% decline in core revenue. Core pricing increased 2%, while volume/mix decreased 4%.
- First-half operating income declined 8.2%, net income fell to $38.1 million from $75.1 million, and Adjusted EBITDA decreased 1.7%. The prior-year comparison included a $20.8 million gain from remeasuring a previously held equity investment.
- Q2 segment performance was mixed: North America revenue decreased 0.7% and Adjusted EBITDA rose 9.7%; Europe revenue fell 5.7% and Adjusted EBITDA fell 21.8%; Australasia revenue decreased 16.8% and Adjusted EBITDA fell 11.9%. First-half North America revenue and Adjusted EBITDA benefited from acquisitions, while Europe and Australasia EBITDA declined.
Cash flow, debt and liquidity
- First-half operating cash flow was $42.6 million, versus cash used of $8.3 million in the prior-year period. Investing cash outflow was $113.8 million, including $57.3 million for the VPI acquisition, $41.1 million of property and equipment purchases and $22.1 million of intangible asset purchases. Financing cash inflow was $76.3 million, including $95.4 million of increased borrowings and $20.0 million of share repurchases.
- Cash, cash equivalents and restricted cash totaled $123.5 million at period-end, including $119.6 million unrestricted cash. Total liquidity, as defined by the company, was $281.6 million, down from $380.2 million at December 31, 2018. Management attributed the decline primarily to the VPI acquisition, capital expenditures, share repurchases and expiration of the Euro revolving facility.
- Reported debt, net of issuance costs and discounts, was $1,570.6 million, including $57.3 million of current maturities; long-term debt on the balance sheet was $1,513.3 million. Operating lease liabilities were separately reported at $194.3 million, including current amounts. The company reported $146.0 million available under its ABL Facility and $16.1 million under its Australian facility; it was in compliance with credit-facility terms.
- Current assets were $1,288.8 million and current liabilities were $778.3 million. Management said cash from operations and available liquidity should be adequate for ongoing operations, planned capital expenditures, other investments and debt service for at least the next 12 months.
Outlook, risks and unusual items
- No specific financial guidance or numerical full-year outlook is provided in the filing. Management emphasizes seasonality and exposure to housing starts, remodeling activity, volume and mix, pricing, foreign exchange, raw-material costs, labor, interest rates and operational execution.
- The company recorded $9.5 million of first-half impairment and restructuring charges, primarily related to plant consolidations and severance. Q2 SG&A included $7.1 million of VPI-related employee retention payments; Q2 also included $8.8 million of facility closure and consolidation costs among Adjusted EBITDA adjustments.
- VPI was acquired in March 2019 for $57.3 million net of cash acquired. Since acquisition, it contributed $16.0 million of revenue and a $1.0 million net loss, excluding retention bonuses. Management notes that acquisition results are included from the acquisition date.
- Steves & Sons litigation: The company accrued $76.5 million for the loss contingency after an adverse judgment that included $36.5 million in past antitrust damages and a divestiture order, subject to appeal. Conditional awards include $139.4 million of future antitrust damages if divestiture is overturned and $9.9 million of contract damages under a further specified appeal outcome. A petition for $28.4 million in attorneys’ fees and $1.7 million in costs was pending. The company filed an appeal and a $40.0 million bond; it says the ultimate impact of a divestiture is not estimable.
- Putative direct- and indirect-purchaser antitrust class actions alleging price fixing remain pending. The company said it could not determine whether a loss was probable or estimate the potential loss; an adverse outcome could be material.
- Management concluded disclosure controls and procedures were ineffective at June 29, 2019 because of material weaknesses in internal control over financial reporting. Remediation was underway, with completion expected by year-end 2019, but the weaknesses would not be considered remediated until controls operated effectively and were tested.
- Adoption of lease accounting in 2019 added approximately $200 million of operating lease liabilities and corresponding right-of-use assets to the balance sheet. The company also began amortizing its global ERP system in Q2.
Most important facts for investors to verify
- Track core volume/mix, pricing and foreign-exchange effects, particularly in Europe and Australasia, and assess whether acquisition contributions can offset weaker core trends.
- Review the appeal, fee petition, bond, potential divestiture and recorded $76.5 million Steves & Sons contingency; also monitor the separate antitrust class actions.
- Assess liquidity and working-capital needs through the seasonal peak, including acquisition spending, capital expenditures, share repurchases and debt service.
- Monitor progress and testing of the internal-control remediation plan, especially the European accounting and reporting controls implicated in the prior-period revisions.
- Reconcile reported debt and lease obligations, and distinguish GAAP results from management’s non-GAAP Adjusted EBITDA and liquidity measures.