JELD-WEN Holding, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures below are unaudited. JELD-WEN manufactures and distributes doors, windows and related products. It reported through North America, Europe and Australasia segments.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net revenue | $4.290 billion | $4.347 billion |
| Gross profit / margin | $872.5 million / 20.3% | $918.5 million / 21.1% |
| Operating income / margin | $190.4 million / 4.4% | $167.0 million / 3.8% |
| Net income | $63.0 million | $141.9 million |
| Diluted earnings per share | $0.62 | $1.33 |
| Adjusted EBITDA / margin (non-GAAP) | $415.0 million / 9.7% | $459.2 million / 10.6% |
| Cash provided by operating activities | $302.7 million | $219.7 million |
| Capital expenditures | $136.2 million | $118.7 million |
Operating cash flow less capital expenditures was approximately $166.5 million in 2019, versus $100.9 million in 2018; this is a simple calculation, not a company-defined free-cash-flow measure. Cash flow from operations improved mainly on working-capital management and lower cash taxes. Capital expenditures increased as the company invested in operations and efficiency initiatives.
Fourth-quarter snapshot
Q4 2019 revenue was $1.069 billion, down about 2.1% from $1.092 billion in Q4 2018. Gross profit was $200.4 million (18.8% of revenue), compared with $224.4 million (20.6%). Operating income was $37.8 million (3.5%), versus $52.8 million (4.8%); net income was $7.8 million, versus $38.1 million. These quarterly data are unaudited.
Debt and liquidity at year-end
Total debt was $1.517 billion, up from $1.478 billion in 2018; cash and cash equivalents were $226.0 million. Cash less reported debt was approximately negative $1.291 billion. Reported total liquidity was $554.5 million, comprising unrestricted cash, $313.1 million available under the ABL facility and $15.4 million available under the Australian facility. The company said it was compliant with its credit-facility terms and expected available liquidity and operating cash flow to meet needs for at least the next 12 months.
Debt included $800 million of senior notes bearing 4.625% and 4.875% interest and maturing in 2025 and 2027, respectively, and term loans with a reported balance of $591.2 million. In September 2019, the company added $125 million of term-loan principal and used proceeds primarily to repay $115 million of ABL borrowings. The filing lists $386.1 million of future interest payments on long-term debt, based on year-end debt and rates.
Changes versus the prior period
- Revenue declined 1.3%. Management attributed the change to a 3% adverse foreign-exchange effect and a 2% decline in core revenue, partly offset by a 4% acquisition contribution. Core revenue reflected a 4% decline in volume/mix and 2% higher pricing.
- Gross margin fell 0.8 percentage points, with manufacturing inefficiencies in North America and unfavorable volume/mix in North America and Australasia outweighing pricing benefits.
- Operating income improved despite lower revenue, principally as SG&A fell 10.0% to $660.6 million. The comparison benefited from the non-recurrence of $76.5 million of 2018 litigation-contingency accruals and lower acquisition/integration costs.
- Net income fell substantially, reflecting a $57.1 million tax expense in 2019 versus a $10.1 million tax benefit in 2018, as well as lower other income. The 2018 result included a $20.8 million gain on a previously held equity investment and tax benefits related to tax-reform accounting and litigation.
- Adjusted EBITDA fell 9.6%. Segment revenue and Adjusted EBITDA both weakened in Australasia; its revenue fell 13.9% and Adjusted EBITDA fell 18.0%. North America revenue rose 3.0%, largely due to acquisitions, while Adjusted EBITDA declined 4.4%. Europe revenue declined 3.0% and Adjusted EBITDA declined 5.4%.
Outlook, risks and unusual items
- Outlook: No quantified financial guidance is provided in the supplied filing text. Management expected European construction and repair-and-remodel activity to remain broadly stable. It expected Australian new-home construction to remain soft in early 2020, followed by modest acceleration. These statements were made before later developments in 2020.
- Strategy and costs: Management emphasized profitable organic growth, pricing, product innovation and operational improvement through its JELD-WEN Excellence Model and facility rationalization program. 2019 included $21.6 million of impairment and restructuring charges; the company cautioned that closures, consolidations and other savings initiatives may disrupt operations or fail to deliver expected savings.
- Steves & Sons litigation: An adverse judgment included $36.5 million in trebled past antitrust damages, an order to divest CMI subject to appeal, and a further $7.1 million award. The court also conditionally awarded future antitrust damages of $139.4 million if divestiture is overturned, and $9.9 million of contract damages in a specified appeal outcome. A request for $28.4 million in attorneys’ fees and $1.7 million in costs remained pending. The company had recorded $78.6 million of charges associated with the matter and appealed; divestiture costs and ultimate effects were not estimable. The appeal was scheduled for May 2020.
- Other litigation: Interior molded-door antitrust class actions remained unresolved; the company could not estimate a loss, and a material adverse effect was possible. A securities class action was filed in February 2020; its outcome could not yet be assessed.
- Financial reporting controls: Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2019 because of material weaknesses in Europe, including staffing and monitoring deficiencies and inadequate controls over customer pricing, journal entries and subsidiary reconciliations. Remediation was ongoing and the weaknesses were not considered remediated. The auditor nevertheless gave an unqualified opinion on the consolidated financial statements.
- Prior-period revisions: The filing revised prior-year financial statements for errors and accumulated misstatements, including fulfillment-cost accounting in a European unit. Management said the errors were not material to prior periods individually or in aggregate; reported cash-flow subtotals were not affected. The filing also says it planned to revise Q1 2019 figures in a future filing.
- Other exposures: Demand is cyclical and seasonal; the filing identifies raw-material and freight inflation, foreign exchange, customer concentration, interest rates, labor, supply disruptions, Brexit uncertainty, environmental obligations, pensions and indebtedness as risks. The largest customer represented about 14.6% of annual revenue; the top ten represented 35%. U.S. pension underfunding was $74.8 million; foreign plans had $38.7 million of unfunded liabilities.
- Environmental matters: The company accrued $0.5 million for remaining investigation and planning at its former Everett, Washington site but could not estimate potential remediation costs. It had $2.3 million in bonds related to a Pennsylvania wood-fiber waste removal obligation due by August 31, 2022.
Most important facts for investors to verify
- Track whether North American manufacturing efficiency and Australasia demand recover, and whether pricing offsets cost inflation and volume/mix pressure.
- Review the Steves appeal, potential divestiture or damages, attorneys’ fees request, and the separate molded-door antitrust and securities cases.
- Monitor remediation of Europe’s material weaknesses, subsequent filings revising Q1 2019 data, and any further financial-statement revisions.
- Assess cash generation, capital spending, debt maturities and interest costs alongside the $554.5 million reported liquidity figure and borrowing-base availability.
- Evaluate the assumptions behind non-GAAP Adjusted EBITDA and its exclusions, including litigation, restructuring and acquisition-related costs.
- Confirm subsequent developments in market conditions and guidance: the filing’s outlook was issued in February 2020 and does not reflect later events.