JELD-WEN Holding, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparisons are with the quarter and six months ended July 1, 2017. The company manufactures and distributes windows, doors and related products across North America, Europe and Australasia. Figures are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,172.5 million | $948.8 million | $2,118.7 million | $1,796.6 million |
| Gross margin | $248.8 million; 21.2% | $231.3 million; 24.4% | $454.7 million; 21.5% | $413.0 million; 23.0% |
| Operating income | $71.1 million | $86.8 million | $109.3 million | $127.6 million |
| Net income | $35.5 million | $46.8 million | $75.7 million | $53.2 million |
| Diluted EPS | $0.33 | $0.43 | $0.70 | $0.46 |
| Adjusted EBITDA (non-GAAP) | $135.0 million | $125.3 million | $222.8 million | $206.3 million |
- Cash flow: First-half operating cash flow was negative $8.3 million, versus positive $66.4 million a year earlier. Investing cash outflow was $223.5 million, including $168.0 million for acquisitions (net of cash acquired) and $51.6 million of capital expenditures. Financing provided $116.2 million, primarily from increased borrowings, partly offset by $47.0 million of share repurchases.
- Balance sheet: At June 30, cash and cash equivalents were $137.6 million, restricted cash $0.4 million, and total debt on the balance sheet approximately $1.542 billion. Current liabilities were $650.6 million against current assets of $1.323 billion.
- Liquidity: Management reported total liquidity of $330.4 million, including cash and available revolving-credit capacity. It expects operating cash flow and other liquidity sources to be adequate for operations, planned capital expenditures, investments and debt service for at least the next 12 months.
Material changes and management commentary
- Q2 revenue rose 23.6%; management attributed the increase mainly to acquisitions (19%), core growth (3%) and foreign exchange (2%). First-half revenue rose 17.9%, primarily from acquisitions (13%), foreign exchange (3%) and core growth (1%).
- Revenue increased across all three segments. Q2 segment revenue growth was 22.0% in North America, 23.1% in Europe and 30.7% in Australasia. First-half segment Adjusted EBITDA declined 2.6% in North America, while increasing 11.6% in Europe and 33.9% in Australasia.
- Gross margin percentage fell in both comparison periods. Management cited acquisition-related dilution, material and freight inflation, and operating investments to support growth; pricing partly offset these pressures. First-half SG&A as a share of revenue also increased to 16.0% from 15.8%.
- Operating income declined despite higher revenue. Net income increased for the first half, helped by a $20.8 million gain from remeasuring a previously held equity interest; Q2 net income declined year over year. Adjusted EBITDA is a company-defined non-GAAP measure.
- Four 2018 acquisitions—D&K, ABS, A&L and Domoferm—expanded the company’s businesses. The company paid approximately $168.0 million cash net of acquired cash and assumed approximately $65.2 million of acquired debt. Acquired businesses contributed $190.0 million of revenue and a $5.2 million net loss from acquisition dates through June 30.
Outlook, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided in the filing. Management’s liquidity statement is its principal explicit near-term outlook.
- Litigation: A jury verdict in the Steves and Sons case awarded $12.2 million for past damages and $46.5 million in future lost profits. Clayton Act damages could be trebled; attorney fees and possible divestiture are additional uncertainties. The company disputes the claims, intends to appeal, considers loss not probable and estimable, and has recorded no reserve. The matter could materially affect results, financial position or cash flows if an adverse judgment is ultimately upheld. Separately, a jury awarded JELD-WEN $1.2 million on its trade-secrets claims.
- Controls: Management concluded disclosure controls and procedures were ineffective at June 30, 2018. Tax-related material weaknesses remained because remediation controls had not operated long enough to establish sustained effectiveness.
- Other risks: The company cites sensitivity to housing and remodeling activity, seasonality, raw-material and freight inflation, foreign exchange, interest rates, acquisitions, product and warranty claims, and its substantial indebtedness. It reported compliance with credit-facility terms at quarter-end.
- Tax and restructuring items: Tax accounting under the Tax Act remained provisional, including the treatment of GILTI. First-half impairment and restructuring charges were $5.5 million, mainly related to plant consolidations and other restructuring. The quarter’s foreign-currency gains benefited other income.
- Environmental contingency: The company must remove a wood-fiber waste pile by August 31, 2022 under a Pennsylvania consent order; $11.0 million of bonds are posted. Management expects to meet deadlines but notes risk if site operations and fuel use decline.
Most important facts for investors to verify
- Whether core demand, pricing and cost actions can offset material and freight inflation and the lower gross-margin rate.
- Acquisition performance and integration, including acquired businesses’ reported first-half net loss and the effect of their debt and working-capital needs.
- Cash conversion and liquidity as seasonal receivables and inventory build, capital spending and acquisitions consume cash.
- The outcome and potential financial exposure of the Steves litigation, including trebling, fees and equitable remedies.
- Progress in remediating tax-related material weaknesses and completing provisional Tax Act and GILTI accounting.