Business context and reporting period
JELD-WEN Holding, Inc. is a global manufacturer and distributor of doors, windows and related products, operating in North America, Europe and Australasia. This unaudited Form 10-Q covers the three months ended April 1, 2017, compared with the three months ended March 26, 2016. Results are seasonal; management says sales are generally higher in the second and third quarters.
Key financial results
Amounts are in U.S. dollars; figures below are in millions unless noted.
| Metric | Q1 2017 | Prior-year quarter |
|---|---|---|
| Net revenue | $847.8 | $796.5 |
| Gross profit / margin | $186.0 / 21.9% | $158.1 / 19.9% |
| Operating income / margin | $37.7 / 4.4% | $23.2 / 2.9% |
| Net income | $6.4 | $6.0 |
| Net loss attributable to common shareholders | $(4.0) | $(20.4) |
| Adjusted EBITDA (non-GAAP) | $81.0 | $61.2 |
| Cash used in operating activities | $(9.5) | $(28.2) |
Revenue increased 6.4%, driven by 6% core growth and a 1% contribution from Australasia acquisitions, partly offset by 1% unfavorable foreign exchange. Higher pricing, productivity initiatives and profitable core growth lifted gross margin; SG&A rose 11.4% to $147.1 million and increased to 17.3% of revenue from 16.6%. Net income was positive, but preferred dividends of $10.5 million resulted in a loss attributable to common shareholders; basic and diluted net loss per share was $0.05, versus $1.13 in the prior-year quarter.
Q1 operating cash use improved by $18.7 million year over year, primarily due to improved profitability and working-capital changes. Investing cash use was $7.7 million, versus $42.0 million, reflecting the prior-year acquisition and lower capital spending. Financing provided $98.3 million, including IPO proceeds and debt repayment; cash and cash equivalents ended the quarter at $185.5 million.
Debt, liquidity and capital changes
Long-term debt was $1,230.5 million, with $15.3 million of current maturities and notes payable, compared with $1,600.0 million of long-term debt at year-end 2016. Following the February IPO, the company repaid $375 million of term loans and amended the remaining facility in March to reduce its interest margin. The term loans carried an effective rate of 4.15% at quarter-end and mature July 1, 2022. The company reported $262.9 million of combined revolving-facility availability and total liquidity of $448.4 million, including $185.5 million cash. It said liquidity should be adequate for operations, planned investment and debt service for at least 12 months; it was in compliance with credit-facility terms.
The February 1 IPO issued 22.3 million primary shares at $23 per share and generated $472.7 million net of underwriting discounts and offering expenses. Preferred stock and Class B-1 shares converted to common stock at the IPO; Onex Partners retained approximately 60% ownership. The company’s share count and equity therefore changed substantially during the quarter.
Segment performance and material changes
- North America: Revenue rose 5.2% to $484.1 million; Adjusted EBITDA increased to $50.2 million from $31.7 million, with higher volume, pricing and productivity partly offset by labor and marketing costs.
- Europe: Revenue rose 1.6% to $242.3 million; Adjusted EBITDA increased to $27.2 million from $24.7 million. Core growth was partly offset by 4% unfavorable foreign exchange.
- Australasia: Revenue increased 24.1% to $121.4 million, including contributions from Trend and Breezway, core growth and currency effects. Adjusted EBITDA rose to $13.2 million from $8.9 million.
Interest expense increased to $26.9 million from $17.0 million, including approximately $7.0 million of debt-cost and original-issue-discount write-offs related to the term-loan repayment. Other expense was $2.6 million, including foreign-currency losses, partly offset by a contract-escrow settlement gain. Restructuring charges declined to $1.2 million from $3.0 million.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management’s liquidity assessment covers at least the next 12 months; interim results are not necessarily indicative of full-year performance.
- Management cited end-market and housing activity, competition, raw-material costs, weather and seasonality, labor, foreign exchange, interest rates, execution of productivity initiatives, acquisitions, customer concentration, product liability and warranty exposure, and indebtedness among key risks.
- Newly highlighted risks include Brexit and potential changes to the U.S. ENERGY STAR program and government policies, including tax and trade policy.
- The company is defending a significant antitrust, contract and tort suit brought by Steves and Sons, which seeks injunctive relief and ordinary and treble damages. JELD-WEN says it believes the claims lack merit. Environmental matters include the Towanda, Pennsylvania waste-removal obligation, with $10.7 million in bonds collateralized and a removal deadline of August 2022; management expects to meet the deadlines.
- Disclosure controls were not effective as of April 1, 2017 because of material weaknesses in income-tax accounting controls. Remediation efforts include external review, hiring experienced tax-accounting staff and tax-reporting software; management expected remediation by year-end 2017, subject to successful testing.
- The filing revises prior-period financial information for errors involving share-based compensation tax treatment, allocation of a tax benefit and other accumulated misstatements. Management judged the errors not material to prior periods individually or in aggregate, but said the cumulative correction would be material if recorded in the current period. Investors should consider the revised comparative figures.
Important facts for investors to verify
- Whether underlying revenue, margin and Adjusted EBITDA improvements persist after accounting for shipping-day differences, acquisitions, pricing and foreign-exchange effects.
- Cash conversion and working-capital needs, particularly given negative quarterly operating cash flow and seasonal business patterns.
- Debt-service costs, the effect of the revised term-loan pricing and interest-rate hedges, and ongoing covenant compliance and borrowing availability.
- Progress and testing of the tax-control remediation plan, and the implications of the prior-period revisions for reported results.
- Developments in the Steves litigation, environmental obligations and other contingencies, as well as potential Brexit, regulatory and policy effects.