JELD-WEN Holding, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; financial statements are unaudited. Comparisons are with the corresponding 2016 periods, which the filing says were revised for immaterial errors and misclassifications. Dollar amounts below are in millions unless stated otherwise.
Business context and results
JELD-WEN manufactures and distributes doors, windows, and related products across North America, Europe, and Australasia. Results are seasonal, typically stronger in the second and third quarters. During 2017, the company acquired Mattiovi, MMI Door, and Kolder for approximately $123.7 million net of cash acquired.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $991.4 | $932.5 | $2,787.9 | $2,693.6 |
| Gross margin | $228.2; 23.0% | $205.7; 22.1% | $642.5; 23.0% | $568.9; 21.1% |
| Operating income | $83.3 | $71.9 | $204.7 | $164.0 |
| Net income | $51.3 | $46.1 | $104.5 | $119.0 |
| Adjusted EBITDA (non-GAAP) | $128.2 | $118.0 | $334.5 | $291.9 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $174.1 | $110.2 |
Financial position and liquidity
- Cash and cash equivalents were $219.5 million at September 30, 2017, up from $102.7 million at December 31, 2016.
- Reported long-term debt was $1,234.4 million, plus $16.8 million of current maturities; the comparable December 2016 balances were $1,600.0 million and $20.0 million.
- Total liquidity, a company-defined non-GAAP measure, was $518.8 million: $219.5 million cash and available borrowing capacity under revolving facilities. The company reported $299.3 million of combined revolving-facility availability and compliance with its credit facilities.
- Nine-month investing cash outflow was $153.5 million, including $123.7 million for acquisitions; capital expenditures were $29.8 million. Financing cash inflow was $85.8 million, reflecting IPO proceeds and debt repayment.
- The company stated that cash from operations and other liquidity sources should cover operations, planned capital expenditures, investments, and debt service for at least the next 12 months.
Material changes and management commentary
- Q3 revenue increased 6.3%; management attributed growth to acquisitions, core growth, and favorable foreign exchange. Core revenue increased in all three segments.
- Q3 gross margin improved to 23.0% from 22.1%, reflecting pricing, cost savings, acquisitions, and the absence of a prior-period $7.4 million material-cost charge; North American windows and parts of Europe had operational inefficiencies.
- Q3 Adjusted EBITDA rose 8.7%. For the first nine months, it rose 14.6%, with growth in all segments. Australasia had the strongest reported revenue growth, supported by acquisitions and favorable currency effects.
- Nine-month net income declined despite higher operating income, with higher interest and other expense and a higher tax provision contributing. The 2016 period included a $26.3 million release of a UK valuation allowance; 2017 included approximately $7.0 million of debt-cost and original-issue-discount write-offs after the $375 million term-loan repayment.
- Interest expense fell year over year in Q3 following the March 2017 term-loan repricing. 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.
- Per-share comparisons are affected by the IPO, preferred-stock conversion, and substantial change in share count. Q3 diluted EPS was $0.47 versus $0.54; nine-month diluted EPS was $0.95 versus $0.52. These figures should not be read as directly comparable indicators of operating performance.
Outlook, risks, contingencies, and unusual items
- No broad numerical revenue or earnings guidance is provided. The company expected its pending Domoferm acquisition, subject to closing conditions, to add approximately €110 million in annualized revenue and be accretive to 2018 EPS excluding purchase accounting; expected closing was mid-to-late Q1 2018.
- Steves and Sons seeks $36 million–$60 million in damages, some potentially subject to trebling, plus attorneys’ fees and injunctive relief including divestiture. Management considers a loss not probable and recorded no reserve; trial was scheduled to begin January 8, 2018.
- Disclosure controls were deemed ineffective because of material weaknesses in income-tax accounting. Remediation work was underway; management expected remediation by year-end 2017, subject to successful operation and testing of controls.
- The filing describes risks including housing and remodeling demand, seasonality, competition, raw-material and labor costs, foreign exchange, operational inefficiencies, debt, acquisitions, product and warranty claims, environmental compliance, and proposed greenhouse-gas regulation.
- Adjusted EBITDA includes substantial adjustments for items management classifies as non-core. Q3 adjustments included $9.1 million in legal costs and $2.7 million in realized hedge losses; nine-month adjustments included $24.9 million in legal costs and $2.7 million in realized hedge losses. Review the reconciliation before relying on this non-GAAP measure.
- The company disclosed prior-period revisions for immaterial errors and expense-classification issues. It stated that the cash-flow subtotals were unaffected; some prior-period tax and earnings figures were revised.
- In November 2017, the North America president exited and the CEO assumed interim leadership; related restructuring charges were expected in Q4 2017. The company also exercised an option to buy Kolder facilities for approximately AUD $9 million.
Important facts for investors to verify
- Whether gross-margin improvement and core growth persist after separating pricing, acquisitions, foreign exchange, and prior-period cost items.
- Whether North American windows and European operations improve, and how freight, material inflation, and restructuring affect segment profitability.
- The cash conversion and return on investment from the 2017 acquisitions, and the terms, closing, and performance assumptions for Domoferm.
- Debt repayment capacity, variable-rate exposure, covenant compliance, and the availability of liquidity across subsidiaries and facilities.
- Developments in the Steves litigation and any resulting financial or operational exposure.
- Progress in remediating tax-accounting control weaknesses and the impact of the disclosed prior-period revisions.