JELD-WEN Holding, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018, compared with the three months ended April 1, 2017. JELD-WEN manufactures and distributes windows, doors and related products across North America, Europe and Australasia. Results are seasonal, with sales typically stronger in the second and third quarters.
Financial performance
| Metric | Q1 2018 | Prior period | Change / context |
|---|---|---|---|
| Revenue | $946.2m | $847.9m | +11.6%; acquisitions contributed about 7% and favorable foreign exchange about 5%. Core revenue was flat: pricing +1%, volume/mix -1%. |
| Gross profit / margin | $205.9m / 21.8% | $181.7m / 21.4% | Margin improved 0.4 percentage points, reflecting pricing, cost savings and acquisitions, partly offset by material and freight inflation. |
| Operating income / margin | $38.2m / 4.0% | $40.8m / 4.8% | Operating income fell despite higher gross profit, as SG&A and restructuring costs rose. |
| Net income | $40.3m | $6.4m | Includes a $20.8m gain on remeasurement of a previously held investment and a $4.0m income tax benefit. Prior-period common shareholders’ loss of $4.0m included preferred dividends. |
| Diluted EPS | $0.37 | $(0.05) | Q1 2018 diluted weighted-average shares were 108.9m. |
| Adjusted EBITDA (non-GAAP) | $87.8m; 9.3% of revenue | $81.0m; 9.5% | Up 8.5% in dollars; margin declined 0.2 percentage points. |
| Operating cash flow | $(65.3)m | $(9.2)m | Greater seasonal working-capital use, including planned inventory buildup. |
| Capital expenditures | $26.6m | $9.2m | Investing cash use also included $165.7m net cash paid for acquisitions. |
Balance sheet and liquidity: Cash and cash equivalents were $103.0m at March 31, versus $220.2m at year-end; total cash, cash equivalents and restricted cash were $103.3m. Total debt carrying value was approximately $1.47bn, compared with $1.27bn at year-end. Current liabilities were $654.1m and current assets $1.28bn. Management reported total liquidity of $334.0m, down from $512.2m at year-end, including cash and availability on revolving facilities. It expected operating cash flow and other liquidity sources to cover operations, planned capital expenditures, investments and debt service for at least 12 months.
Segment trends and material changes
- North America: Revenue +2.8% to $497.9m; Adjusted EBITDA -6.3% to $47.0m. MMI Door acquisition supported sales, but core volume/mix declined 3%; EBITDA faced lower core volumes and lagging price recovery for material and freight inflation.
- Europe: Revenue +24.5% to $301.7m and Adjusted EBITDA +24.3% to $33.8m. Acquisitions and favorable currency were important contributors; core revenue rose 2%.
- Australasia: Revenue +20.7% to $146.6m and Adjusted EBITDA +26.4% to $16.7m. Acquisitions, pricing and favorable currency contributed; material inflation was a partial offset.
- The company acquired ABS, A&L and Domoferm during the quarter for approximately $165.7m net cash consideration and assumed about $64.6m of acquired debt. Purchase accounting remained preliminary. Acquisition-related costs were $2.3m.
- Interest expense declined to $15.7m from $26.9m, largely reflecting lower debt and the prior-year write-off of financing costs. Debt at quarter-end included $800m of senior notes and borrowings under term loans and revolving facilities.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management cited seasonality and expected available liquidity to support requirements for at least the next 12 months.
- Management identified material and freight inflation, housing and remodeling activity, interest rates, raw-material availability and pricing, foreign exchange, labor, acquisitions and execution of cost-saving initiatives among relevant business risks.
- A jury returned an unfavorable verdict in the Steves & Sons litigation: $12.2m past damages and $46.5m future lost profits. The company expects Steves to elect one basis for past damages; Clayton Act damages may be trebled, and attorney fees and possible divestiture are also at issue. JELD-WEN disputes the claims, intends to appeal, and recorded no reserve because it did not consider a loss probable and estimable. An adverse final outcome could materially affect financial results or cash flows.
- Disclosure controls were deemed ineffective at March 31, 2018 because tax-related material weaknesses remained. Management reported remediation efforts but said controls had not operated effectively for a sufficient period to conclude the weaknesses were resolved.
- Tax accounting for the Tax Act remained provisional; the company was still evaluating certain tax effects, including its GILTI accounting policy. The Q1 tax benefit included discrete benefits associated with acquiring the remaining interest in an equity investment and stock compensation.
- Subsequent to quarter-end, the board authorized a $250m share repurchase program through 2019. It does not require purchases and may be suspended or terminated.
Investor verification priorities
- Assess how much reported revenue and Adjusted EBITDA growth reflects acquisitions and currency versus sustainable core performance, especially North America volume and margins.
- Track cash conversion, seasonal inventory and receivables, acquisition-related funding, and liquidity after the quarter-end repurchase authorization.
- Review debt levels, borrowing availability, variable-rate exposure and compliance with credit-facility covenants.
- Monitor the Steves litigation for judgment, trebling, fees and divestiture developments; no loss reserve was recorded.
- Check progress in remediating the tax-control material weaknesses and resolution of provisional Tax Act accounting.